Analysis: Binance brought in $446 million in profits in 2018 despite the bear market

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zhaochangpeng

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QUICK TAKE

  • In 2018, despite the bear market, the exchange delivered $446 million in profits; less than the CEO’s projections
  • Profits declined sharply in the second half of 2018 as a result of declining trading volume and larger investments in infrastructure
  • Coinbase likely had smaller profits despite projecting $456 million in October

Binance CEO Changpeng ‘CZ’ Zhao told Bloomberg in early July that he expected the exchange’s net profit to be between $500 million and $1 billion in 2018. However, based on The Block’s calculations the firm was a bit shy of hitting the low-end of CZ’s prediction, bringing in a total of $446 million.

To be sure, Binance doesn’t disclose its financials, but the profits can actually be deduced fairly easily with some back-of-the-envelope math. From its initial ICO offering in 2017, Binance raised $15 million for 100 million Binance Coin (BNB) out of 200 million in total supply. As part of maintaining its coin, Binance uses 20% of its net profits to buy back BNB and destroy 100 million BNB tokens, according to the whitepaper. After every BNB burning, Binance publishes a disclosure report.

So far, Binance has had six quarterly BNB burns, in which it destroyed a little over 10.8 million BNB. Every burn is done based on BNB price on the day of the burn, which means that if the BNB totals are multiplied by the price of BNB on the day of the burn, we can get a USD equivalent of 20% of the profits. Binance’s profit is simply five times the USD equivalent of each burn, if the firm is staying true to its whitepaper commitment.

In total, Binance has brought in approximately $655 million in six quarters of its short existence. Binance’s most profitable quarter was Q4 in 2017, in which it brought in more than $200 million. In 2018, the company generated $446 million in net profits, $54 million below the lower bound of CZ’s estimate. As seen in the data, nearly 71% of annual profits was generated in the first half of 2018. In Q3, the profits fell by 51% compared to Q2. And in Q4, the profits continued dropping; another 39% quarter on quarter.

The decline in profits coincides with a decrease in trading volume, which has been felt across crypto exchanges. In October, Binance started donating all listing fees to charity, which could also put negative pressure on Q4 profit. Binance has also been heavily investing in opening separate fiat-to-crypto exchanges, developing a decentralized exchange and also expanding personnel. Binance opened its second fiat-to-crypto exchange in January after launching one in Uganda last October.

By comparison, according to a document reviewed by Bloomberg in October, Coinbase had projected $456 million of profits in 2018, though whether they hit their target remains uncertain. If Coinbase over-projected demand, as CZ did, it’s likely that of the two, Binance ended up generating larger 2018 profits.

Coinbase charges much higher fees but brings in significantly smaller traded volume than Binance. In January, Coinbase’s traded volume was less than an eighth of Binance’s. Drawing a comparison from the traditional finance world, NASDAQ, the second-largest stock exchange, brought in $734 million in net profit in 2017, but the exchange employed 4,700 people – more than 15 times as many as Binance.

Binance is the largest spot cryptocurrency exchange by trading volume and defended that spot consistently throughout 2018. The company employs more than 300 people and has approximately 10 million users.