Crypto Exchanges: When utility is actually a security

No matter how great the talent or efforts, some things take time. You can’t produce a baby in one month by getting nine women pregnant.

- Warren Buffet


Unless you have been living under a rock for the past 12 months, it should be no surprise that some of the best-performing projects/tokens through both bear and bull market have been exchange-based ‘utility’ tokens.

Here at the desk, we have had an extremely bullish view on crypto-exchanges for quite some time, but that doesn't mean we can't see past the incredibly grey-area that most of these projects are operating in.

In this issue of Dark Pools, we once again put politics and niceties aside to explore the largely synthetic and 'controlled' world of exchange tokens, and why despite their many issues, they are still the prize-winning horse that will continue to attract the smart money.

Play by the rules, get left behind.

Since the dawn of day, crypto-exchanges have tried to justify their blockchain-issued utility tokens in three simple ways:

  1. use them for exchange fees

  2. use them for withdraw fees

  3. use them for listing fees

Now on face value, we admit that the preceding is in fact a better ‘utility’ than most other projects in the market, however, sticking purely to such a simple tokenomics model has proven to be commercial suicide for these projects and subsequently, a tragedy for token investors.

Case in point; $QASH by Liquid (formerly known as Quoine)

By abiding to the former utility cases described above, Qash managed to shrink their market-capitalization from +$800m down to $40m in less than twelve months.

Now this is an interesting case, given that Liquid.com just raised a Series C at valuation of over $1 billion. Why then would a project that is raising money (on an equity basis) hand-over-fist, and reaching unicorn status, have a token that is amongst the worst performers in the entire crypto ecosystem? More on this later..

Introducing ‘The Burn’ - another way of saying ‘Security Token’.

Binance ($BNB) has been a market ‘darling’ since ICO in 2017. You will note from the original Binance whitepaper that the utility of $BNB is consistent with the above, however, it has one small addition - ‘the burn’.

‘The Burn’ - AKA, Share Buyback.

In the world of stocks and equities, there is a term used for ‘the burn’ which in theory, is almost identical to the concept employed by many exchanges - it’s called a Share Buyback and Retirement.

Essentially, based on the profitability of the company over a certain period, the management will buy shares back on the open market and ‘retire’ them, therefore increasing the price of actively circulating stock.

Sound familiar?

So does ‘the burn’ actually make it a security?

Despite how completely obvious it may be to us, regulators haven’t quite caught up with this. Expecting a return or ‘profit’ based on company revenues and operating performance is clearly a trait of a traditional security. There is no disputing this.

The genius of these exchanges is when they disguise ‘the burn’ amongst other factors of ‘utility’ including trading fees, listing fees, lottery tickets etc etc. This muddies the waters to the point where tokens such as BNB are some hybrid, ‘frankensteinesque’ mashup of utility and security that isn’t actually backed by a dollar of fiat.

So is it a security? Despite what your views may be, the quarterly buyback and burn has been a hit amongst exchanges since it first came out, and the returns are proving to be juicy.

Those exchanges implementing a quarterly buyback through the burning mechanism are all outperforming the general market by a huge multiple.

The returns speak for themselves.

Need more evidence?

OkEx launched a token in April this year. The very first utility that the website advertises for OKB is… you guessed it - Buy and Burn.

OKB since launch

So what does this all mean?

As investors, we are constantly seeking Alpha, which means that we are looking for the best returns comparative to the rest of the ecosystem. Despite our comments, the returns on both an equity and token performance basis are, without a shadow of a doubt, in the exchange market.

We don’t deny that there may be a ‘shake-out’ of some of these exchanges in the future.

Cracks are already beginning to appear:

  1. Binance recently announced the burning of pre-mine tokens that were allocated to the team. *Our theory* on this relates to pressure from the USA and the possible classification of BNB as a security token. Cancelling premined tokens may help the team significantly in discussions with regulators.

  2. Qash token holders are really pissed off. The headco, Quoine, used funds to go down the regulated and legal path with a focus on Japan. The fact that Quoine did not implement tokenomics resembling security tokens (quarterly burning) means that price performance has suffered greatly. To rub salt in the wound of Qash investors, revenues that would otherwise be burned by other exchanges are actually held by Quoine (liquid.com) instead, therefore contributing to their recent unicorn valuation.

  3. LEO token backed by Bitfinex has had a raft of issues. Tied up in legal battles between US contributions for its LEO sale and the scrutiny of USDT (Tether), they are not excluded from the firing line.

But.. we are talking about stacking sats here right?

It’s not really fair for us to single out exchanges that are actually growing the ecosystem, even if they are walking the tightrope..

In a largely unregulated industry filled with exit scams and pump and dump schemes, we take our hat off to the exchanges that are constantly innovating. We actually love exchange-tokens, because with such similar characteristics to securities and equities, they are the one thing that we can actually formulate data-driven financial valuations for.

Don’t let our unfiltered comments turn you into a bear. We are bullish exchanges and have been for some time, but we won’t lie to ourselves. To face reality means that we have to be aware that as investors, we are taking very speculative exposure in these exchange-tokens, which are subject to a huge degree of uncertainty and regulatory risk.

Read our research on LEO and BNB for comprehensive valuation modeling and a better understanding of how share-buybacks *cough*…. I mean, token burning for exchanges works.

Until next time.

Matthew Dibb | CIO

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About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit www.astronaut.capital or follow us on twitter.


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