Are The Binance And FTX Exchange Tokens A Good Bet?

Are The Binance And FTX Exchange Tokens A Good Bet?
Jonathan Hobbs, CFA

over 1 year ago5 mins

  • Binance and FTX are top-tier digital asset exchanges. And while you can’t invest in shares of those companies, their respective exchange tokens, BNB and FTT, are another option.

  • Each exchange has its own unique selling points. Binance is the largest exchange by a country mile, while FTX offers unique and innovative derivative products for traders.

  • When it comes to holding exchange tokens, the biggest risk is around regulation, and whether regulators will clamp down on an exchanges’ ability to grow its business.

Binance and FTX are top-tier digital asset exchanges. And while you can’t invest in shares of those companies, their respective exchange tokens, BNB and FTT, are another option.

Each exchange has its own unique selling points. Binance is the largest exchange by a country mile, while FTX offers unique and innovative derivative products for traders.

When it comes to holding exchange tokens, the biggest risk is around regulation, and whether regulators will clamp down on an exchanges’ ability to grow its business.

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Crypto companies have had a tough time of it this year. But two blue-chip crypto exchanges, Binance and FTX, have held up pretty well, continuing to build out their platforms. And while you can’t invest directly in the exchanges through stocks, you can add their exchange tokens to your crypto portfolio.

What do these exchanges and their tokens do?

Crypto exchanges match buy and sell orders for their customers, and they take a small fee for each of those transactions. Exchanges like Binance and FTX offer other services too, including: staking crypto to earn a yield, trading crypto derivatives, crypto lending and borrowing, and buying and selling NFTs. Binance and FTX also have their own tokens, which their customers can use to get more utility out of their platforms.

What’s the value in holding BNB, Binance’s exchange token?

BNB is the third-largest digital asset by market size (if you exclude stablecoins). And it’s got four strong selling points.

First, traders pay lower fees when trading in and out of BNB on the Binance exchange (compared to trading in and out of dollars, for example), so they’ve got more incentive to hold the token as their “base” trading currency. Binance is the world’s most heavily traded crypto exchange. In any given month, it processes more trading volume (green bars) than its next four competitors combined.

Source: CryptoCompare.
Source: CryptoCompare.

And it's the same story with crypto derivatives volume (green bars): Binance processes more volume than its eight closest rivals.

Source: CryptoCompare.
Source: CryptoCompare.

Second, Binance also has its own blockchain, Binance Smart Chain (BSC). Since its users need BNB to pay the fees to use it, demand for BNB goes up as its blockchain grows. After Terra Luna’s collapse, BSC became the second-biggest player in decentralized finance (DeFi) in terms of the total value locked inside its smart contracts, with over half of that coming from the decentralized exchange, PancakeSwap (CAKE). And according to DappRadar, BSC also has the second-highest number of daily users out of any blockchain – right behind the popular gaming blockchain WAX.

Third, the supply of BNB is dropping. There are around 165 million BNB, but that number is expected to shrink over time. See, BNB “burns” its tokens regularly – by sending them to a dormant wallet address – and it’ll keep doing that until there are only 100 million BNB left. If the supply of BNB keeps dropping while demand for the token keeps rising, you’ve got a recipe for long-term price appreciation (all else being equal).

Fourth, BNB has outperformed “stable” bitcoin during the latest crypto crash. Most digital assets tend to fall way harder than bitcoin in a bear market – but not BNB. It’s climbed 50% versus bitcoin since November of last year. Sure, it’s down 56% in US dollars over that time, but the fact that it’s held up better than the OG crypto in the downturn is a testament to its resilience. What’s more, BNB beat bitcoin in the 2018 bear market too.

BNB priced in bitcoin. Chart drawn with TradingView.
BNB priced in bitcoin. Chart drawn with TradingView.

What’s the value in holding FTX’s exchange token, FTT?

FTX hasn’t been around as long as Binance, but it’s quickly established itself as a formidable trading operation. Here are four reasons why I like its long-term prospects.

First, the market value of FTT is just under $4 billion – and that means there could be a lot of upside potential if the exchange keeps growing. FTT’s market size is less than 10% of BNB’s, which sits at around $46 billion. Sure, FTX processes just a fraction of Binance’s trading volume right now, but that could change with time as it builds out its offering. As with Binance and BNB, traders are incentivized with lower trading fees to use FTT on the exchange, so there’s already ample demand for the token.

Second, FTX stands out as a crypto derivatives platform. Traders can buy or sell a range of derivative products that each track different areas of the crypto market, including Defi (DEFI-PERP), privacy coins (PRIV-PERP), or just a general basket of altcoins (ALT-PERP). FTX also offers tokens that track the prices of stocks like Netflix and Tesla, and “prediction markets” that let traders bet on a number of real-world outcomes, including election results.

Third, FTT is also burned out of supply. There are around 330 million FTT tokens right now – down from 350 million. And according to the exchange’s website, those will be burned until at least half are removed from existence. If token demand continues to grow as the exchange gets bigger, that could give a serious long-term boost to its price.

Fourth, FTT has been stealing market share from other crypto projects. Like BNB, FTT has outperformed bitcoin since the market peaked in November – albeit by only about 40% compared to 50%. That said, FTX has mostly been gaining market share versus the overall crypto market for the past three years (gray line).

FTT token value as a percentage of the entire crypto market. Chart drawn with TradingView.
FTT token value as a percentage of the entire crypto market. Chart drawn with TradingView.

FTT now accounts for about 0.40% of the total crypto market, up from 0.01% in 2019. BNB has out-traded the rest of the market too, mind you, but it already makes up nearly 5% of the whole market.

So what can you glean from all this?

When you’re investing in crypto, there’s always the risk of market volatility. And when you’re investing in exchange tokens, there’s some added regulation risk too: authorities might determine those tokens are essentially shares in a crypto exchange. That would mean both Binance and FTX would have had to make a whole raft of disclosures when they sold those tokens in the first place – which, of course, they did not. The whole thing could create confusion among investors, but I don’t see it as being more than a temporary setback for these businesses. They’re both well funded, after all, and have armies of lawyers with which to fight that kind of battle.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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