AUG 28, 2023
Valuation Logic of CEX Tokens
by 吴说猫弟, WuBlockchain
Ⅰ. Two-Stage Growth Model for CEX Tokens
I mentioned that a big pitfall of CEX tokens is not to blindly trust P/E ratios. The underlying principle here is the dividend growth model. We consider buybacks, dividends, new listing privileges, and fee offsets as dividends. Thus, theoretically, the valuation of CEX tokens should be proportional to dividends. Following this valuation logic, the "Big Three" investment values in 2020 were HT＞BNB＞OKX.
However, the results are evidently incorrect. The reason lies in the fact that only considering P/E ratios equates to using a first-stage valuation model. In reality, at least a second-stage model should be employed. Besides current revenue, future growth rates also play a decisive role. Of course, the cryptocurrency market exhibits typical bull and bear cycles, making the actual model more complex. Generally, growth rates will decisively impact valuation and value regression.
In essence, the valuation of platform tokens depends on current value capture ability + growth potential.
Ⅱ. True Driving Force of CEX Tokens in Bull Markets
The next question is: What determines growth rates decisively? The answer is assets.
As mentioned before, the best buying point for CEX tokens is the beginning of a bull market. Some might find this statement meaningless, but here, the "beginning of a bull market" doesn't need to be so precise. This bull market doesn't refer to BTC at $6,000. To be more direct, a good buying point for platform tokens emerges when BTC stabilizes at its all-time high (ATH).
The logic behind this is straightforward: exchange profits stem from trading and asset sinking. Genuine trading demand explosions often accompany asset explosions. When BTC rises from $10,000 to $30,000, exchanges can't earn substantial profits, as trading is mainly confined to BTC at this stage. Yet true trading volume originates from the burst of assets. In 2017, it was ICOs; in 2020-2021, it was DeFi Summer, GameFi, and new public chains.
Considering this, BNB's success is not surprising. From 2019 to 2020, Binance took a leading position in the asset layer competition, at least one step ahead. Specifically, two pillars were instrumental: Binance Labs and BSC. If you had followed Binance's IEOs since 2019, you'd realize that these projects weren't illogical; rather, they were interconnected, forming network effects. One prominent sign was that over half of the previous IEO projects were among the announced partners for a certain Binance IEO. This was just the beginning. During this period, Binance Labs gradually came into prominence (founded in 2018).
At this point, the wheels of fate were already turning. IEOs and projects invested in by Binance would become one of Binance's greatest fortunes during the bull market.
Later in 2020's DeFi Summer, nearly all exchanges missed the first round to varying degrees, but Binance swiftly launched BSC. The initial version of BSC essentially absorbed the excess demand for ETH at that time. Meanwhile, many employees of rival exchanges didn't even know how to use wallets.
With the support of Binance Labs and BSC, BNB achieved unprecedented success, leveraging its layout advantage in the asset layer into the right to issue assets in a bull market. The logic was simple: the highest-quality, most wealth-effective assets would first launch on or trade against BN; as a trader or project, why would you choose otherwise? This established the growth cycle:
More users, stronger wealth effect, higher-quality assets
Comparison with other exchanges is possible. FTX, relatively successful, followed a similar path as Binance; Huobi also achieved significant results via this strategy, even rivaling or surpassing BSC at one point. Unfortunately, OKX was clearly lagging at this stage.
As an aside, while Binance's investments and token listings have stirred controversy, based on my personal experience, Binance Labs focuses more on long-term value than short-term gains. This is reflected in Binance Labs' willingness to lead investments and invest larger amounts. Contrary to many VCs that pursue low valuations and smaller co-investments, Binance Labs is less valuation-sensitive. Often, Binance Labs even requests project parties to extend the token vesting period, including its own.
For a certain exchange-related VC I won't name but whose founder has been arrested, you may find that their investments ultimately haven't performed well. This is because they enter Pre-Seed rounds with lenient terms for some projects. I won't elaborate further, but the comparison is clear.
III. Slowing Growth in Bear Markets and Regulatory Pressures
The second stage of the two-stage dividend growth model enters a stable state. High growth is inevitably unsustainable. Many factors contribute to this, such as growth slowdown due to larger bases, increased management difficulties, decreased business efficiency.
An additional point here relates to the "impossible triangle" for exchanges. Although initially proposed when analyzing on-chain prediction markets, this framework is also applicable to cryptocurrency exchanges due to their many grey areas. In simple terms, exchanges exhibit economies of scale. The larger the scale, the more non-linear the growth of value capture ability. Opting for compliance + scale inevitably sacrifices some profits, while opting for scale + profits means relinquishing certain compliance measures.
This is the issue Binance currently faces. Many other exchanges may not have the same compliance level as Binance, but their scale is smaller, resulting in less regulatory pressure. Besides regulatory pressures, we can see Binance is currently under various growth pressures, such as downsizing rumors, copy trading launch, and requiring project parties to introduce business partners. Of course, these pressures won't fundamentally change Binance's fundamentals; they are merely the inevitable outcomes of sufficient scale + bear market + aggressive strategy.
IV. Offensive and Defensive Strategies
In contrast to Binance's aggressive strategy, OKX represents a "defensive strategy" archetype. We can observe that Binance has been emphasizing education from investment to token listing to operations. This is the manifestation of growth anxiety. Binance has already captured as much stock market as possible, and to ensure sustained high growth, attracting outside traffic is the only way.
On the contrary, OKX has implemented the following during a certain period:
(1) Few token listings;
(2) Significantly invested in asset management: high-interest savings subsidies, Shark Fin, structured products—all aimed at attracting stock users and stock asset sinking;
(3) MPC wallet, AA wallet, NFT aggregation market, blending CeFi and on-chain world—these products are designed to keep users within the OKX ecosystem amidst the trend toward on-chainification.
In my view, this defensive strategy has been quite successful during the 2022-2023 bear market period. OKX has gained users and reputation, which to some extent explains OKB's price performance.
V. Back to the Beginning: Is it Worth Accumulating CEX Tokens?
If you ask me which CEX tokens I favor or consider to have the best fundamentals, I can answer:
Despite facing strong regulatory and high-growth pressures, BNB's fundamentals haven't fundamentally reversed. Binance still holds a leading position, possesses asset layer advantages, has the most potent profit potential, and has the imaginative space brought by opBNB and Greenfield.
OKX is one of the best-performing exchanges during the bear market, especially its defensive strategy has achieved significant success. This defensive strategy can also switch to an aggressive strategy when the bull market comes. Defense doesn't equate to permanent defense.
BGB is one of the few exchanges persisting with an aggressive strategy during the bear market. Additionally, BGB holds advantages from the former Bitkeep wallet, ForesightNews, and Foresight Ventures.
However, if you ask me whether I hold any BNB/OKB/BGB, I can tell you unequivocally: I hold none of them, and I don't plan to buy any at the current prices in the foreseeable future. Three reasons:
(1) Valuations are somewhat high.
(2) Valuation methods are ineffective. An interesting point here is that we don't even know the actual circulating supply of these three CEX tokens (excluding the portions held by founders and platforms). A typical view is that most of BNB was bought back before the bull market, most of OKB was bought back after the Shanxi incident, and BGB maintained a high control level since its issuance. For these three platform tokens, any valuation model is completely invalid.
(3) As mentioned earlier, platform tokens don't directly benefit from the bear-to-bull transition; rather, they benefit from the asset explosion in the early to mid-stages of a bull market. This asset explosion is still far away, and the window for entry won't close immediately.
A counterintuitive viewpoint is that buying BNB at $200 now won't necessarily be more cost-effective than buying BNB at $800 in the next bull market. Considerations include risk-reward ratios and opportunity costs. What if it takes a long time for a bull market?What if Binance encounters issues or gets flipped during this period? What about the returns from other investments during this time, or even the losses avoided by staying out of the market?
As for other CEX tokens, truthfully, I have limited usage or knowledge. But overall, I don't think these platform tokens are excellent targets at this stage. Now is the mid-term phase of liquidity depletion, and this is also the most painful period for exchanges with less potent profitability. Sometimes, surface-level data doesn't ensure absolute security, as seen with Dragonex and Fcoin in the previous cycle. Sacrificing potential gains to preserve capital isn't a bad thing.