A handful of cryptocurrency exchanges have suddenly become multi-billion dollar companies. The explosion in bitcoin’s popularity has propelled once-running small platforms into strong positions generating millions of dollars in revenue every day.
The amazing returns are a flick in the eyes of the stock and currency trading platforms that have chosen to stay out of the world of digital assets. They should watch these barely-there four-year-old startups boast their bumper revenue. The question is: How long can the boom last?
Previously unreported figures indicate that exchanges such as Binance and FTX are on track to generate more than $1 billion in profits this year, according to the companies as well as calculations by the Financial Times.
This was underlined on August 10 when Coinbase, the largest listed digital asset exchange, beat market expectations by reporting a rise in net income in the second quarter to $1.6 billion from $32 million in the same period last year.
“The growth has been phenomenal,” said Ben Chu, CEO of Singapore-based Bybit, with $76 billion in digital assets trading on May 19, the platform’s busiest day. “Volumes today are 20 times higher than they were in 2019.”
But the huge profits come at a time when authorities in many jurisdictions are trying to tighten their grip on what happens on these platforms. The rapid growth rate is likely to intensify regulatory scrutiny. With competition between exchanges heating up, major players can seek revenue away from trading, in anticipation of downward pressure on huge profit margins for the time being.
The largest cryptocurrency venue by volume, Binance has generated $1.8 billion in trading revenue since the beginning of the year, according to FT calculations. This number is based on Binance’s average trading fee of 0.03 percent on $6 trillion in transactions, using data from CryptoCompare.
That puts the company on track to beat last year’s profit of between $800 million and $1 billion, according to Changpeng Zao. The platform’s CEO, known in the industry as CZ, founded the company in 2017. He noted that the privately owned company, which has no official headquarters, rarely calculates its earnings in US dollars. “[Profits are] Held in various cryptocurrencies thus [it] It fluctuates on a daily basis.
Other large exchanges have also benefited from the rising popularity of Bitcoin. Hong Kong-based FTX expects to make a profit of nearly $400 million this year, Sam Bankman-Fried, the company’s CEO, told the Financial Times. That compares with earnings of about $77 million last year, based on total trading volumes and an average fee of 0.02 percent cited by Bankman-Fried.
“A couple of years ago, we were running sort of a microcosm of the existing business,” said Bankman-Fried. “It’s exactly the same as when we started but everything has two extra zeros behind it.”
Average daily volumes on the largest cryptocurrency exchanges have grown exponentially in the past year to rival the volume of transactions made in the traditional cryptocurrency markets. Meanwhile, major players in cryptocurrency trading can charge multiples of what their peers outside of the digital asset markets can: average fees range from 0.02 percent to 0.05 percent, compared to about 0.01 percent for offshore digital assets.
The extraordinary growth rate has translated into inflated valuations. Bankman-Fried created FTX in 2019 to create a reliable trading platform for computer-run cryptocurrency trading company Alameda Research. Last month, FTX was valued at $18.7 billion as part of a funding round that raised $900 million from investors. In February of last year, the stock exchange was valued at $1 billion.
But the rapid growth rate may soon prove unsustainable due to the decline in the number of new bitcoin buyers, rising regulatory costs and increased competition. Marcus Hughes, Coinbase’s head of UK and Europe, said the company is looking at ways to expand its services and reduce its reliance on trading revenue.
The risks of regulation also loom large. FTX’s Bankman-Fried said it could “end badly” if industry participants do not engage with regulators, while calling for more clarity around the rules.
In the past, Bybit’s Chu said cryptocurrency exchanges have benefited from a lack of regulation as regulators have not paid much attention to the digital asset space in previous years. That has changed in the last year.
“I think those who say they don’t care about regulation are either lying or they don’t understand what’s going on,” Chu said.
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