With the price of bitcoin soaring past US$10,000 this week, the idea of trading it for a less proven token sounds crazy. But for the nouveau riche of the cryptocurrency world, it’s an opportunity to invest in faster-moving currencies.
“Most guys who are holding bitcoin are high-risk, early adopters. They have a high tolerance [for] swings,” explains Changpeng Zhao, founder of Binance, a cryptocurrency exchange operating out of Tokyo. “Sometimes it’s not even about the money. People just want more.”
Sometimes it’s not even about the money. People just want more.
That’s one of the drivers behind growing exchanges like Binance, which deals exclusively in cryptocurrency – no dollars or fiat currency of any kind. Instead, traders buy and sell bitcoin, ether, and a variety of tokens from different initial coin offerings (ICOs), a cryptocurrency-based crowdfunding model that’s raised more than US$3.7 billion for blockchain projects this year. It’s a way for bitcoin traders to diversify their holdings through riskier tokens with potentially higher returns.
Zhao says Binance’s exchange processes about US$500 million in trade every day, of which the company takes a 0.1 percent fee – which drops to 0.005 percent if users pay commission in Binance Coin (BNB), Binance’s own token. In its first quarter ending in October, the company reported a profit of about US$7.5 million in commission fees.
Not bad for an exchange that launched in July.
“This year, ICOs have definitely contributed to exchange volume,” he says. The increasing number of bitcoin buyers has boosted trade as well, as it’s the first cryptocurrency most people become familiar with. Still, there’s a lot more room to grow, emphasizes Zhao.
“The crypto space even today is a very small part of the overall market potential,” he says, pointing out that the traditional equity market is much larger. “This is just the beginning.”
The 40-year-old Zhao’s foray into cryptocurrency can be traced back to poker. In Shanghai, he used to play in a private group that included Bobby Lee, now CEO of BTCC, one of the largest cryptocurrency exchanges in China. Ron Cao, managing director of venture capital firm Sky9 Capital, played as well. In 2013, Cao urged Zhao to get into bitcoin – this was around the time when Lee bought BTCC.
“We had a group of guys that played poker together,” remembers Zhao. “Ron and I have always been pretty good friends, and on a poker table, you can tell the other guy’s personality pretty well. So we always had respect for each other.”
The more you deal with fiat, the more authorities can control you.
He then left his job at Fusion Systems, an IT and business consultancy, and dove in as head of development at Blockchain, a software platform for digital assets. In 2014, he became CTO of OkCoin, a major exchange for fiat and cryptocurrency in China. A year later, he left that too amid controversy between his friend, bitcoin evangelist Roger Ver, and OKCoin.
This year, Zhao felt it was the right time to move into a purely cryptocurrency exchange (what he calls ‘exchange 2.0’), as he watched the volume of cryptocurrency exchanges like Poloniex rise.
“If you do fiat to crypto […] you have to have a bank account that can accept money,” he says. “That has its own advantages and problems. You have to deal with regulatory issues and usually you’re tied to one country.”
Binance doesn’t have to deal with banks at all. “We don’t touch fiat so we don’t have a bank,” he explains. “But we have to deal with a lot of different wallets, [so] we have to integrate a lot of different wallets – we have to keep all of them secure.”
The lack of fiat has helped Binance in others ways too, particularly during China’s crackdown on ICOs and bitcoin exchanges in September. The fact that Binance was purely a cryptocurrency exchange meant that they weren’t contributing to capital outflows – a large concern for the Chinese government.
“The more you deal with fiat, the more [authorities] can control you,” says Zhao. “The bank will freeze your bank account. They can make the wire transfer slow.”
The company was also lucky – a week before the ban was announced, Zhao’s team moved all their servers out of China. Now, the founder is working on opening another office in Hong Kong and has moved the company’s core team out of mainland China.
When there’s rumors of a China ban, people panic and sell.
“At least in China, [fiat-to-cryptocurrency exchanges] are not very possible in the foreseeable future. So crypto-to-crypto exchanges emerged,” says Chris Zhou, cryptocurrency trader and head of China operations at BTC Media, a media outlet focusing on digital currency. Cryptocurrency-exclusive exchanges are “a way to bypass the tightening regulation.”
“In the meantime, it is also a sign that people are trying to use bitcoin or ether as a standard cryptocurrency. To every other coin, this acts as a benchmark crypto. I think this is going to be a trend,” he tells Tech in Asia.
The excitement around regulations this year has helped drive volume for the young exchange. Earlier this year, Japan recognized bitcoin as a form of money, opening the flood gates for Japanese investors and exchanges such as bitFlyer, which this week announced plans to expand into the US. Even China’s ICO ban has boosted trade.
“When there [are] rumors of a China ban, people panic and sell,” explains Zhao. “Even though the price might be going down, the volume will be high. Hence the commission fees charged by the exchange – the revenue from exchanges – will be high.”
“The worse you can expect is no news. Then it just stays flat,” he says. “There’s no trade.”
Besides facing competition from the industry’s more established and larger exchanges, such as Bittrex and ShapeShift, security will certainly be an ever-present challenge for Binance. The short history of cryptocurrency is riddled with exchange hacks, notably Mt. Gox, which reportedly lost US$460 million to hackers in 2014.
“I still use crypto exchanges, but I keep to my favorites and abstain from leaving too much money there because I’ve been burned by two exchange hacks and closures, namely Cryptsy and Mintpal,” says T.M Lee, co-founder of CoinGecko, a data platform that tracks hundreds of cryptocurrencies.
“I lost a lot of altcoins there, which are worth a lot today – not much then,” he adds.
I’ve been burned by two exchange hacks and closures.
Zhao says the company practices multifaceted security measures, from using network security to prevent social engineering attacks to securing its physical office locations. Different groups of white-hat hackers conduct penetration tests on Binance’s system monthly, he adds.
Of course, savvy traders – or traders that have had bad experiences – won’t rely on exchanges to keep their money safe. For those who aren’t trading tokens every day, it is often deemed safer to store cryptocoins in their own wallets, where they have more control over withdrawal.
On top of security, Binance is prioritizing team expansion and opening more office locations. The company also runs an incubator called Binance Labs, and is working on its own ICO listing platform and developing a decentralized exchange.
(Correction: This article was updated three hours after publishing to correct Binance’s daily trade volume.)