When Changpeng Zhao first learned of the existence of bitcoin during a poker game with some friends in 2013, he sold his apartment in Shanghai as fast as he could. He invested the proceeds in the crypto currency.
Soon ‘CZ’ started working for prominent crypto projects, including the pioneering service provider Blockchain.com. At the time, the company was working on ‘wallets’ accessible to the general public, the digital wallets in which you keep cryptocurrencies safe and which are used to send and receive many digital currencies. He learned the tricks of the trade at OKCoin, one of the first bitcoin exchanges in the world that mainly served the Chinese market from San Francisco in spot trading between regular money and cryptos.
In 2017, Zhao set up his own exchange platform Binance, fully focused on crypto-to-crypto trading. His ambition: to build a safer, more reliable and faster version than the hundreds of platforms built daily at the time, and lure the user with slightly lower trading costs. Within a year, Zhao was a billionaire.
Today, Binance is the world’s most popular platform for trading bitcoin, still the largest and best-known cryptocurrency, and alternatives such as ethereum and tether. The company facilitated more than $9.5 trillion in transactions last year. That is about two-thirds of the total trading volume handled by centralized crypto exchanges, according to figures from research firm The Block Research. The exchange office earns a percentage of 0.1 percent on every transaction. It has also rolled out various services, such as a special payment card for crypto payments, and launched its own crypto coin.
Zhao, now 44, falls into the crypto-rich category due to his success: entrepreneurs who have earned a fortune in a short time from trading cryptocurrencies. That trade took off during the pandemic, especially among young investors looking to tackle their lockdown boredom – a market that crypto advertisers eagerly dived into.
Explosive growth
Where the strong price fluctuations of cryptocurrencies often cause great uncertainty for investors, entrepreneurs like Zhao benefit from the trade that is fueled by this. Rising price or free fall: crypto trading continues. “Over the past three years, the crypto market has exploded from $100 billion in total market value to its peak of $3,000 billion last year,” said Bert Slagter, analyst at LekkerCryptisch, a cryptocurrency knowledge platform, and author of the book. Our money is broken† “Platforms like Binance benefit from network effects: the bigger they are, the more services they can develop and the more liquidity there is.” Their revenue model is largely based on user activity, explains Slagter. “For example, in the form of transaction costs. The more trade, the more turnover. And with these large parties, that runs into the billions.”
Since its inception in 2017, the number of active Binance users (at least two transactions per month) has increased to 28.6 million in October 2021. Binance itself does not provide figures on a regular basis, but now annual revenue is estimated by Bloomberg at at least 20 billion dollars, with an annual profit of around 1 billion dollars.
Binance is not the only crypto service provider to successfully operate in the turbulent crypto world in a relatively short period of time. The American trading platform Coinbase, founded in 2012, has experienced a similar growth spurt in recent years. Coinbase also offers crypto coins, although the trading house with about fifty currencies is a lot more selective than Binance, which offers more than six hundred coins. The number of active Coinbase users now exceeds 9 million.
The big man behind Coinbase is 39-year-old Brian Armstrong, a former software developer at rental platform Airbnb. He recognized early on that cryptocurrencies had the potential to disrupt the payments industry, provided the less technical user could exchange or transfer the coins more easily. For example, Coinbase focuses on short, slick explainer videos – sometimes starring Armstrong himself – at the novice crypto investor (“that’s how you set up a crypto wallet”).
The key to success for the trading platforms is to provide security, says bitcoin developer Sjors Provoost, who worked for Blockchain.com from 2014 to 2017. “The most important thing is that customers do not lose their cryptocurrencies. This can happen when a trading platform itself is robbed, as happened with the well-known bitcoin exchange MtGox, but also because customers become victims of internet criminals.”
Go to the fair yourself
Traditional investors can now also contact Coinbase. During the crypto hype in the spring of 2021, the trading platform was the first of its kind to go public on its own. Since then you can invest in crypto without purchasing it yourself. The IPO provides an interesting insight into the operational management of the platform, which is now obliged to publish figures. In 2021, Coinbase’s total trading volume was $1.7 trillion, generating $6.8 billion in transaction revenue, or 0.41 percent per transaction — significantly more than competitor Binance. Also interesting: the company wrote red numbers in the first quarter of 2022 when the volatility of cryptocurrencies was less.
Brian Armstrong owns about 20 percent of Coinbase’s outstanding shares. The value of that interest fluctuates strongly, because the share price of Coinbase appears to be just as volatile as that of the crypto coins that the company trades. Although that price is currently more than 80 percent lower than at the introduction, the IPO made Armstrong a billionaire in one fell swoop.
The career of the just 30-year-old Sam Bankman-Fried is comparable to this. He is the founder of trading platform FTX, which has been operational since 2019. Unlike Binance and Coinbase, FTX focuses more on derivatives: investment products derived from cryptocurrencies that allow you to speculate on a rise or fall in a price, such as futures and options. . Some of these products are risky for individuals because of their leverage – which can greatly increase profits but also losses. For that reason, they are banned in some countries, such as the Netherlands. Reason for Bankman-Fried to keep an office in the Bahamas, where there is less supervision and taxes are virtually absent.
The fact that derivative investment products are not allowed everywhere does not hinder the belief in FTX among investors. The fast-growing derivatives exchange raised no less than $900 million last summer from investors, who estimated the value of the very young company at $18 billion. Which instantly made Bankman-Fried one of the richest twenty-somethings of all time.
Future uncertain
Yet the future is uncertain for this new generation of crypto-rich. Will their trading platforms remain popular or will there be only one winner? What remains after the collapse of certain cryptocurrencies about their faculties† On Monday, major turmoil arose in the crypto markets again due to problems at ‘bitcoin bank’ Celsius, with the price of both bitcoin and Ethereum taking a nosedive. A month ago, the same happened after the collapse of the crypto currency Terra, which was seen as a stable currency. And how is the regulation developing worldwide? For example, the EU is one of the first international regulators to work on legislation for crypto trading.
Binance, registered in the Cayman Islands, was already at odds with regulators in Asia, the US and Europe. It was forced to bar American customers to avoid regulation and was forced to stop selling shares linked to shares in Europe. tokens† Although Coinbase is publicly traded, compliance with stricter legislation and the fight against money laundering will almost certainly incur higher costs and therefore lower margins. And in mid-May – just after the collapse of ‘stablecoin’ Terra and a bitcoin price crash – FTX suddenly announced that in addition to uncovered coins and derivatives, the platform will now also offer traditional stocks and ETFs (Exchange Trade Funds, or index trackers), first in the market. US A sign on the wall?
“Large companies always find a way to get favorable regulations for them,” says bitcoin developer Provoost. “The question that I think is more important is: what remains of ‘crypto’? Will you soon be able to only buy coins on Coinbase whose blockchain is fully regulated – and therefore not decentralized at all? And will you no longer be allowed to send coins to your own wallet, as the anti-money laundering organization FATF would like?”
In short, the crypto rich are far from resting on their laurels.
A version of this article also appeared in the newspaper of June 14, 2022