Cryptocurrency prices move both up and down, but one set of companies always profits: crypto exchanges. These trading platforms have also attracted the attention of big pocket investors and venture capitals, and they are receiving astronomical sums from them at insane valuations.
FTX.com, which became one of the leading crypto trading venues in terms of volume, recently hit a valuation of $32 billion, jumping from $25 billion in just three months. The US subsidiary of this global exchange touched the $8 billion valuation mark separately last month.
While FTX and its investors were vocal about the exchange’s valuation, Binance, which leads the pack of global crypto exchanges, never disclosed its value. However, a former Binance executive said that the exchange could be worth $300 billion.
So, what is driving this astronomical valuation of cryptocurrency exchanges? And, is it even fair to put such a high valuation on these young exchanges?
“When it comes to the valuation, we should in the first place think in terms of the fundamentals which are pertinent to any commercial vehicle, such as its ability to generate cash flow, its long-term prospects, and the return at which the company can produce value for its investors,” Sergey Zhdanov, the COO of crypto exchange EXMO, explained to Finance Magnates.
However, these metrics alone cannot be predicted with some level of certainty and are not sufficient to evaluate the fair valuation of crypto exchanges as so many other factors also need to be considered.
“With that in mind, looking from the present-day perspective, I believe that nobody can be sure about how realistic the valuations of the exchanges are to their true market value,” Zhdanov added.
Exchange Always Make Money
The valuation of crypto exchanges does not directly depend on market trends: buyers will jump in during a bull run, while holders will liquidate their cryptos in a bear market. In other words, crypto exchanges always make money as they charge fees and spreads for executing orders.
“Valuation of crypto and digital asset exchanges will continue to grow as the clearing requirements of the burgeoning asset class continues to increase,” said Sang Lee, the CEO VegaX Holdings.
Coinbase is the only public crypto exchange listed on a US stock market and discloses financials every quarter. However, the company reported mixed numbers for the quarters after it became public.
The ultimate goal of most of the big private companies is to become public. But, how is Coinbase, being the only public crypto exchange, performing in the open market? Well, shares of the company significantly shed their value from the initial levels of the direct listing. However, the case is different for private crypto exchanges.
The valuation of these companies mostly co-relate with tech startups. They are highly scalable, and their offerings and geographical reach can be easily expanded, with the minimum capital requirement. Also, in the case of the crypto exchanges, this scalability can be accelerated because of the borderless nature of cryptocurrency trading.
While FTX.com is based in the Bahamas, Binance does not even have any physical presence. Most of the offerings are not based on fiat, so they can circumvent local regulations to onboard traders from any jurisdictions, well, mostly.
Eric Chen, the CEO and Co-Founder of Injective Labs, said: “These platforms have the potential to be highly scalable with minimal marginal cost. I can understand the justifications behind these valuations. While these private valuations may appear high, the short-term premium certainly pales in comparison with the long-term growth should their theses play out.”
Decentralization Is a Threat
Though regulators are now tightening the noose of these unregulated platforms, the only major threat of these crypto-to-crypto trading platforms is the rise of decentralized exchanges.
The popularity of decentralized finance (DeFi) platforms are skyrocketing day by day with the increase in the lockin crypto on them. The offered staking rewards also lure crypto holders to provide liquidity to these platforms and earn interest. But, they are still far behind their centralized counterparts.
Too Many Exchanges?
The crypto market has grown aggressively over the past few years with the growing interest from both retail and crypto space. Though this should have encouraged new crypto exchanges to enter the market, in reality, the existing ones are only getting bigger. Exchanges like Binance and FTX are even acquiring small local exchanges to grow their global footprints.
“In the short history of crypto, we have seen multiple paradigm shifts in crypto exchanges. While I do think that a few major crypto exchanges will achieve close to 50% market share, the roster of top players may shift. Decentralized finance and decentralized exchanges are what Coinbase categorized as a threat to its business model, I certainly agree with that,” Chen added.
