One simple truth that MicroSoft and many other companies that populate the Information Technology (IT) space have learned over the years is that to survive, one must learn how to transactionalize your revenue streams. Living by product sales can leave you stranded in bad times and competing furiously in the good. Having transaction revenue streams that collect the money over longer stretches form the type of life long annuity that can keep an entity aFloat, no matter if the times are good or bad.
Crypto exchanges, although operating in a nascent industry, have already employed this basic business maxim. Revenue streams are based on transaction and volume figures, a percentage here and a fixed fee there, with occasional one-time-only fees for services rendered. As a result, even though Crypto Winter has crippled many businesses and caused nearly a thousand companies to shut their doors, crypto exchanges like Binance and Coinbase appear to have profited handsomely during 2018.
To date, no crypto exchanges are public entities. They are privately owned and are not subject to disclosure requirements that would detail financial performance over a period of time. In these instances, one must rely on other factors – a leaked report from an insider, financial data given to the press after a successful fundraising, or any other kind of data that would shed light on the topic. The Block, a crypto community resource and research firm, investigated available information on both Binance and Coinbase and determined quite conclusively that each company had raked in sizable profits.
In the case of Binance, the investigative path was made easier, since the exchange also has a token of its own, Binance Coin (BNB), which recently ascended to the tenth position on the overall crypto Hit Parade. There is publicly available data related to quarterly inventory burns, such that a creditable analysis could be made related to the quarterly finances of its issuer. The total profit for 2018 for Binance came in at $446 million, according to the researchers at The Block.
The breakdown by quarter was $149.6 million in Q1, $166 million in Q2, $80.9 million in Q3, and then $49.6 million in the final Q4. Crypto Winter did have a noticeable impact, considering the declining amounts over time. It should also be noted that Q4 of 2017 came in at $201 million, more than four times Q4 for 2018. With its coffers full of cash, Binance has expanded its product and service line, opened new exchanges and an OTC desk, moved its headquarters to Malta, and, as reported, “relaunched their Binance Launchpad, a token sale platform which recently issued the popular BitTorrent (BTT) ICO”.
Binance may be the number one exchange at the moment, although OKEx is contending for the top spot, but Coinbase, the largest crypto exchange in the United States, is doing quite well, too. Information on this firm is harder to come by. It does not issue a token that might require occasional disclosures of financial results. The firm, however, did complete a very lucrative financing round in Q4 of last year. Financial information was published at the time that $300 million was raised. Statements touted that the firm now had a post-money valuation of $8 billion.
This valuation conferred upon Coinbase the right to claim that it was the most highly valued crypto exchange in the market. There are several large data processors that are traded in our public stock markets. Price/Earning multiples for these entities can range from 15X to 30X, depending upon several factors. Private companies typically do not receive equivalent multiples when valued, but even if we take the low-end figure of 15X, it would indicate that Coinbase has annual profits in excess of $500 million.
What ever the true figures may be, both of these exchanges illustrate that the path to extreme riches in the crypto space may be to create an exchange. After its successful funding round, one of the founders of Coinbase was declared to be the first self-made billionaire in the cryptocurrency arena. He may not be the last.