Determining the intrinsic value of the Binance Coin (BNB) and why you should be buying it
The purpose of this short article is to try to determine the intrinsic value of the Binance Coin (BNB)
Note: If you are new to the crypto currency world I would strongly recommend to read my friend’s article: An Overview of Cryptocurrencies for the Savvy Investor
What is Binance Coin (BNB)?
BNB is a ERC20 based token issued by Binance with a total supply of 200mm tokens.
Characteristics/Advantages of BNB
1) Saving in trading fees: if you use BNB in Binance exchange you get discounted trading fees with the following schedule:
1st year 50%
2nd year 25%
3rd year 12.5%
4th year 6.75%
(You can also use BNB to pay withdrawal fees or any other Binance fees)
2) Buybacks: additionally every quarter Binance will use 20% of its profit to buy back until 100mm of BNB are burned
For example, in the fall of 2017, Binance burned 986,000 tokens or what it is equivalent to 0.493% of the tokens issued.
3) Additional forms of value: Binance states that they are going to use BNB for other projects that could generate value. You could use it to participate in new ICOs. For the purpose of this post, I will assign this part $0 value in calculation and consider it as an upside.
Economic Incentive to buy BNB: if you decided to trade in Binance, you should buy BNB to pay for half of yours trading commissions and as long as the value of BNB don’t decrease you are going to be saving in trading fees.
How much BNB would you need to be saving fees in trading? A simple formula could be:
(Capital*rotation*feeRate)/discount
where:
Capital is the amount of money that you want to trade/invest
Rotation is the number of times that you are planning to buy and sell your capital
FeeRate is what you pay to Binance in commissions = 0.1%
Discount is the % that you are going to save by paying in BNB. For example, the first year would be 50%
Example:
Capital: $10,000
Rotation: 6 planning to buy and sell my total capital at least 3 times
FeeRate: 0.1%
Discount: for the first year is 50%
Total amount to buy in BNB is = $30, at the current rate of $5 per BNB you should be buying 6 BNB.
Of course, this is assuming that the value of BNB doesn’t change, which is probably not going to happen (if the value decreases you will need more BNBs, if it increases you are going to need less BNBs for your commissions).
Calculating the Value of BNB
Based on the fee schedule you can determine that during:
1st yr $1 equivalent to 2 BNBs (saving $1 if you use BNB for transaction fees)
2nd yr $1 equivalent to 1.333 BNB (saving $0.33)
3yrd yr $1 equivalent to 1.15 BNB (saving $0.15)
4th yr $1 equivalent to 1.07 (saving ($0.07)
The present value of these cash flow is equal to $1.54
*assuming that discount rate is 0 which in the crypto world is not a valid assumption since a day could be a year in traditional investing.
The Floor Value: BNB should be worth at least $1.54.
So why is it trading at $5 as I write this? Are people speculating with the potential value of other things, like the ICO participation?
There is also the scarcity factor. No new BNBs are going to be issued (or at least , not for now). There is no verifiable information on who bought BNBs in the ICO or who currently holds it, but if Binance continues growing at the current rate, people always have the economic incentive to buy BNB to save in fees in the first years.
Another approach for the valuation of BNB is to consider the number of total users. Binance just reported that it reached 2.6mm active users. Assuming that each user is like the one in the example described above, each user needs 6 BNB for trading fees. We will need 15.6mm of BNB just during the first year. This, of course, is assuming that the number of users doesn’t grow. Additionally, that the average user has $10k in capital and that everyone is going to be buying BNB in the exchange, which is not true, but these are conservative assumptions.
Based on this and other factors described, I estimate that the value of BNB could easily reach $50 in Q1 of 2018.
Where to buy BNB?
You buy it in Binance exchange. You will need to open an account and transfer one of the crypto currencies accepted.
More about Binance
Binance is a fast growing crypto currency (ccy) exchange that opened only 4 months ago. It became very popular since other big exchanges suspended new accounts openings until mid January. I opened my account 2 weeks ago and I love the Customer Service and the the platform is very easy to use.
You should also know that their website does not state who is behind BNBs or where operations are located. There are sites where you can find more information about the people behind the exchange.
In Binance you can’t buy Bitcoin against USD (or no fiat ccy exchange) you can only trade crypto ccy against other cryptos. To open an account it is easy and you will need first an account in CoinBase or Gemini to buy your base ccy (like BTC or ETH) and later transfer them to Binance.
Risks
- Binance credit risk: you are trusting them not only as an exchange, but also if you are keeping your crypto ccy with them, which is optional
- Binance Management Team: you are trusting that they will burn tokens using 20% of the profits and run the exchange as best in class
- BNB could decrease in value if the crypto world suffers a major loss (correlation)
Disclaimers
I bought/hold BNB
The link to Binance has my referral code
Binance didn’t pay me or ask me to write this post
