This Little-Known Cryptocurrency Has Risen 1,300% This Year, And Now It’s After Bitcoin’s Crown

This Little-Known Cryptocurrency Has Risen 1,300% This Year, And Now It’s After Bitcoin’s Crown
Reda Farran, CFA

almost 3 years ago3 mins

What’s going on here?

Everybody’s heard of bitcoin, ethereum, and Ripple’s XRP. But a lesser-known “altcoin” has seen its price surge 13-fold in 2021, becoming the third most valuable cryptocurrency in the process. Today’s Insight is all about binance coin (symbol: BNB) – and whether and why you might want to add it to your crypto portfolio.

What does this mean?

BNB is issued by Malta-based Binance, the world’s largest crypto exchange by trading volume. As such, it’s considered an “exchange token”: its fortunes are highly tied to those of its parent. BNB can be used to pay for trading fees on the Binance exchange – and with trading volumes rocketing as OG crypto bitcoin hits fresh record highs, it’s easy to see why BNB has benefited.

But paying trading fees isn’t the only thing BNB’s good for. The altcoin can also be used to cover transaction fees on Binance’s own-brand blockchain network.

Back in September last year, the company launched Binance Smart Chain – a beefed-up rival to the Ethereum blockchain. Both networks are competing for bigger shares of the decentralized finance market, which promises innovative access to peer-to-peer lending and crypto trading in particular. And while Binance’s version isn’t truly “decentralized”, its transactions are considerably faster and cheaper. That’s proving a hit: according to Bloomberg, Binance Smart Chain’s daily transaction volume recently reached an all-time high of five million, compared to Ethereum’s 1.3 million.

Two further factors besides soaring use of BNB-related products have likely supported the altcoin’s rapid price rise this year. First, rival cryptocurrency exchange Coinbase’s groundbreaking stock market debut this week has sparked increased interest in exchange tokens. That’s because they’re often viewed as proxies for shares in their associated companies – arguably the crypto industry’s top revenue-rakers.

Second, BNB lagged strong performances for top-two cryptocurrencies bitcoin and ethereum in 2020 – their prices rose 300% and 500% respectively, compared to a mere 200% for BNB. Investors cottoning on to that mismatch have been playing catch up, however: with a market capitalization of almost $85 billion, BNB has now pipped XRP to the number-three spot.

Why should I care?

Even after its strong run so far in 2021, BNB’s total value remains a fraction of bitcoin’s and ethereum’s. If you think Binance’s exchange and blockchain are both likely to see continued success – and Coinbase's stock market debut is likely to fuel wider investor interest in cryptocurrencies – then there’s a good chance the token’s price rise has further to go. BNB could therefore be a canny addition to your crypto portfolio.

As always, do thorough research of your own before investing – and be well aware of the risks. Crypto’s penchant for high volatility and large drawdowns was evident in BNB’s 8% fall on Tuesday this week.

And the association with Binance also brings unique risks of its own. In an industry where decentralization is prized, the Chinese-founded company risks future backlash should it be seen to interfere with the blockchain network it centrally owns and operates. Furthermore, Binance is currently under investigation over concerns it allowed Americans to trade in ways that violate US law.

Lastly, unlike Coinbase’s recently listed shares, BNB ownership confers no right to any of the parent company’s profits. Investors in the token are essentially betting on supply-and-demand dynamics – but if you bought in just a couple of months back, that’s a bet that will have paid off handsomely.

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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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