Executive Summary:
Binance is an exchange that allows users to buy and sell cryptocurrencies and other digital assets. It offers a variety of other products and services, such as an online education platform, cloud solutions, or collective crypto mining amongst others.
Binance makes money from trading fees, interest on loans, spreads, fees from its broker program, cloud offerings, interchange fees, mining services, and profits from investments.
Founded in 2017, Binance has quickly risen to become the world’s largest cryptocurrency exchange by trading volume. The company posted net profits of $1 billion in 2020 alone.
How Binance Works
Binance is a FinTech company that offers a variety of crypto-related products to customers in over 180 countries across the globe.
Its flagship offering is the Binance exchange which allows retail as well as institutional investors to buy, sell, and trade cryptocurrency. More than 500 currencies can be traded on the platform.
What furthermore separates Binance from other exchanges is the vast number of trading options it offers. Examples include stop limit or market orders, margin trading, and peer-to-peer trading.
Users can also donate their existing crypto assets to various charities supported by Binance. The platform does not take a cut and all proceeds go to the charity of the user’s choice.
To ensure that traders make educated decisions, Binance has launched its so-called Academy. It serves as a knowledge base for everyone seeking to inform themselves about crypto-related topics.
Customers can also borrow cryptos (using their own holdings as collateral), stake them, and even pay with them using the Binance debit card (powered by Visa).
Additionally, Binance has developed a variety of products for business clients. Examples include an API or widget for businesses to offer their own brokerage products, the Binance Cloud (an all-in-one solution for partners to launch digital asset exchanges quickly), and even a program to launch your own token.
Binance can be accessed by visiting the firm’s website or by either downloading its desktop client or mobile app (available on Android and iOS devices).
Binance Company History
Binance, headquartered in Valletta, Malta, was founded in 2017 by Changpeng Zhao (who’s known as CZ and acts as the firm’s CEO) and Yi He.
CZ, who was born in Jiangsu, China, grew up in an intellectual household with both his parents being educators. Unfortunately, in the late 1970s China, when CZ was born, being a professor meant keeping most of your opinion to yourself.
His father was even labeled a “pro-bourgeois intellect” and, for a short time, exiled from the country right after CZ was born.
In the late 1980s, CZ’s family eventually migrated to Vancouver, Canada. CZ himself helped out the family wherever he could, flipping burgers at McDonald’s and working late-night gas station shifts.
He eventually enrolled at Montreal’s McGill University to pursue a degree in Computer Science. Post-graduation, CZ spent time in both Tokyo and New York, but he never wanted to settle for any of his jobs. He always had a goal ahead that the previous job couldn’t satisfy him with.
After building systems to match trade orders at The Japan Stock Exchange and then later developing software for futures trading at Bloomberg’s Tradebook, CZ was promoted three times within two years whilst managing teams across London, Shanghai & Tokyo.
However, this wasn’t enough – he became impatient, so he quit to start Fusion Systems which helped build some of the fastest high-frequency trading systems available.
Zhao first learned about Bitcoin in 2013, when he met a venture capitalist at his poker game. He joined Blockchain.info as the third-ever member of their Wallet team–a risky move for even an experienced developer with proven skills like Zhao’s. As head of development there, it was his job to work closely with some prominent Bitcoin evangelists including Roger Ver and Ben Reeves.
After eight months at Blockchain.info, CZ joined OKCoin, an exchange for spot trading between fiat currencies and digital assets, as chief technology officer. Zhao became so obsessed with crypto that, in 2014, he sold his apartment in Shanghai for $1 million and invested all of it into Bitcoin (at a price of $600 per coin). Despite major downturns, CZ has held on to almost all of his coins.
In 2015, he eventually co-founded BijieTech, a provider of cloud-based systems to exchange operators. At the time, the majority of exchanges were clunky and extremely slow while offering a subpar user experience. To add on, none of them offered customer support.
CZ’s BijieTech, on the other hand, had developed a fast matching-engine trading system that was being used by dozens of exchanges (and made the company profitable from day one).
What eventually prompted CZ to launch his own exchange was the ICO (short for Initial Coin offering) boom that was taking place in early to mid-2017. Dozens of blockchain and crypto-related projects raised hundreds of millions for their launch.
Binance’s ICO was nothing short of a success. Within a matter of 16 days, CZ’s team put together a white paper and launched its ICO on 1st July 2017. The result: $15 million in equivalent in cryptocurrency raised as well as 20,000 user signups – and tons of PR to come with it.
And just like that, Binance was off to the races. By the beginning of 2018, a little over half a year in business, Binance had amassed over six million users, making it the world’s largest cryptocurrency exchange.
Its Binance token (called BNB) rose from 10 cents at launch to $13 over the same time span, giving it a market capitalization of $1.3 billion (today, the BNB token is the third-largest currency by market capitalization, trailing only Bitcoin and Ether).
Unfortunately, bad news would also follow the firm pretty much from its inception onwards. In March 2018, Japan’s Financial Services Agency threatened to initiate criminal charges due to Binance’s lack of registration with the regulator.
As a result, Binance moved its headquarters from Tokyo to Valletta, Malta. Back then, the Maltese government had created favorable regulations and a welcoming business climate for crypto companies of all kinds.
Interestingly enough, Tokyo wasn’t the firm’s first choice for its headquarters. Binance initially started out in China, but given the Chinese government’s harsh stance on cryptocurrency (and decentralization as a whole), CZ and team were soon forced to move.
In June 2018, after a continuous price hike of its BNB token, Binance announced the launch of its $1 billion venture fund to support blockchain and cryptocurrency startups. Eligible startups would receive the funding via its BNB token.
The move mimicked Coinbase, one of its major competitors, which had launched its very own venture arm back in 2018 and invested millions into other startups. A month later, Binance made its first-ever acquisition with the purchase of Trust Wallet.
Many of the firm’s moves were aimed at increasing its user base (i.e., brand recognition) as well as activity on the platform (since that equates to more cash circulating in its ecosystem). As such, Binance for instance launched its (now) well-known Academy back in December 2018 to educate users about blockchain and crypto topics.
What absolutely propelled Binance to new heights, though, was the introduction of fiat currency conversions as well as subsequent additions of new payment options (such as debit or credit card). Prior to that, users were only able to buy currencies using their own crypto holdings. After the change, they could simply pull out their credit card and purchase crypto in the currency (e.g., EUR or USD) of their choice.
Additionally, Binance also became renowned for welcoming new cryptocurrency projects on its exchange at a rapid pace. As such, it always had the greatest variety of offerings available, which particularly enticed crypto enthusiasts looking for niche opportunities.
It has to be noted though that some of these coins were quickly discontinued. Binance was known to have a rather relaxed validation process, which meant that many so-called shitcoins wound up on the platform. Furthermore, speculations arose that Binance was taking as much as 400 BTC as a sort of bribe to onboard and promote new tokens.
Despite the fact that Bitcoin lost 70 percent of its value in 2018 (and activity on exchanges positively correlates with trading volumes), Binance still raked in $446 million in annual profits – after only having launched 18 months prior!
Nevertheless, trouble wasn’t too far away either. In May 2019, a hacker retrieved 7,000 Bitcoins from a single Binance account. Luckily for the account holder, Binance had just launched its Secure Asset Fund for Users (SAFU), a quasi-insurance program that reimburses users in the case of damage.
Other significant features that Binance introduced that year were margin trading (June), lending (August), or futures trading (September). 2020 certainly wasn’t less successful.
Fueled by stay-at-home orders as a result of the coronavirus pandemic, more and more people flocked to online trading and cryptocurrencies in particular. Binance took advantage of that upswing by making its biggest-ever acquisition. It paid $400 million for CoinMarketCap, the world’s leading aggregator of exchange volume and cryptocurrency pricing data.
By mid-2020, more and more institutional clients (such as banks) were also signing up on the platform. To accommodate these customers, Binance made sure to add a variety of products, including an over-the-counter (OTC) trading desk or shared mining pools.
Another major introduction became the launch of its Binance-branded credit card, which finally allowed users to use a physical payment gateway to buy goods in the real world.
2020 also saw regulators taking a closer look at the exchange. In September, Roskomnadzor, the Russian federal authority responsible for media regulation, banned citizens from accessing Binance in the country.
A month later, Forbes published an investigative piece, detailing how Binance.US (its American subsidiary) “conceived of an elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States”. Binance denied all claims and filed a lawsuit against Forbes for defamation.
The sentiment of heightened government awareness and regulation has continued well into 2021. In April, Germany’s Federal Financial Supervisory Authority (BaFin) stated it had reasonable grounds to suspect that Binance was violating local securities laws after launching a tokenized stock trading product.
Today, more than 1,500 people are employed by Binance which operates offices across the globe. It has even become one of the top 500 most visited websites in the world according to Alexa. More than 15 million users access the platform every month.
How Does Binance Make Money?
Binance makes money from trading fees, interest on loans, fees from its broker program, spreads, cloud offerings, interchange fees, mining services, and profits from investments.
The platform also used to also generate income via listing fees from the launch of new crypto tokens. In October 2018, after rumors began swirling that the company accepted up to 400 BTC as bribes, it decided to make its listing fee structure transparent and donate all the proceeds to charity.
I won’t take revenue from its other businesses and acquisitions into account to keep the analysis short and concise. One of the most prominent examples is CoinMarketCap, which Binance acquired for $400 million in 2020. CoinMarketCap makes money primarily via referral fees from recommending other services.
Without further ado, let’s dive into each of Binance’s revenue streams in more detail below.
Trading Fees
Trading cryptocurrencies on Binance is not free of charge. Binance charges a variety of fees associated with the different trading products it offers.
Retail and institutional investors on Binance can engage in a variety of trading styles, including on margin, via future contracts, or by purchasing synthesized stock tokens.
With cryptocurrencies, Binance charges a fee whenever a user buys or sells a particular digital asset. Generally, trading on Binance incurs a fee of 0.1 percent.
If traders use BNB, Binance’s own currency, then those fees will be discounted. Additionally, Binance also charges withdrawal fees whenever a trader wants to cash out on his or her earnings.
Apart from simple BUY and SELL orders, traders on Binance can furthermore engage in margin and futures trading.
Given their risky nature as well as the fact that traders do not hold the underlying asset, these types of trading methods charge significantly higher fees.
For instance, if users want to trade Bitcoin on margin, then the yearly interest rate (= APY) can be as high as 18.25 percent. Margin fees can be found here while future trading fees are listed under this link.
Spread
Since April 2021, users can also purchase stock tokens, which essentially resemble the value of a real-world stock such as Apple or Tesla.
The value of a token is pegged to the value of the underlying share. If that stock is rising in price, then the token increases by the same percentage. Just like real stocks, tokens can only be traded during active market hours.
Buying and selling a token does not incur any fees. Nevertheless, it can be assumed that Binance does not offer synthesized stock trading free of charge.
In all likeliness, Binance will generate income through the so-called spread, which is the difference between the BUY and the SELL price.
For instance, if you BUY at 40.00 and the SELL price at that moment is 39.25, then the spread is the difference between the two (equal to 1.9 percent).
Binance can essentially direct the order flow to the highest bidder since all of the transactions are routed through its platform.
Broker Program
Binance works together with some of the world’s leading crypto brokers to offer them account management, order matching services, the API and Widget Broker, personalized marketing consulting, as well as settlement systems.
Started in September 2019, Binance now works together with more than 570 partners across 30 countries.
The program is set up so that the broker can solely focus on acquiring new clients and increasing its assets under management.
To join, broker partners need to have at least 20,000 users (including but not limited to crypto investing) and generate at least 1,000 BTC in monthly trading volume.
Again, Binance makes money through the program via trading fees. Up to 60 percent of those fees are then funneled back to the broker.
Additionally, the top 10 Binance broker partners (ranked by trading volume) will receive 10 percent of the revenue generated through this program as a reward.
This acts as a sort-of flywheel that incentives brokers to increase their user base and volumes on the platform.
Cloud
The Binance cloud is a software-as-a-service (SaaS) offering that allows other businesses to launch digital asset exchanges quickly.
Binance, in this case, provides the underlying infrastructure, security, as well as liquidity while the partners can focus on business development and operations.
The platform supports spot trading, namely crypto-to-crypto and fiat-to-crypto, as well as P2P fiat exchange. Partners can furthermore list their own tokens (upon successful approval).
Binance generates revenue from its cloud product by virtue of an annual fee and a trading fee commission revenue split. The company does not publicly disclose fee structures.
In all likeliness, the fee structure is dependent on expected volumes as well as the attractiveness of the customer that the customer targets.
Interest On Loans
Users and institutions on the platform can apply for crypto loans as well as earn interest by lending their own crypto holdings to Binance.
Binance loans range anywhere between 7 to 180 days. Users can use their crypto holdings on the platform as collateral.
Binance generates money from those loans based on the interest it charges. The interest rate is dependent upon the amount borrowed, how much collateral is posted, the type of currency borrowed, as well as the repayment period selected.
Alternatively, users can also earn interest on their crypto assets (via Binance Earn). Interest rates can be as high as 21.6 percent APY.
Binance offers a variety of products for users to deposit their funds, such as Savings, BNB Vault, Launchpool, or Locked Stacking.
Depending on the product chosen, Binance either lends the money to other users seeking loans or even institutions in need of liquidity.
These borrowers then pay interest on those loans, namely higher than the one a user is set to earn. Binance collects the difference as profit.
The concept of crypto borrowing and lending was pioneered by BlockFi, which launched its loan product back in 2017.
Interchange Fees
In July 2020, Binance launched a debit card in conjunction with Visa. To use the card, customers transfer funds from their crypto to their spot wallet. The card can be used by over 60 million merchants worldwide.
Whenever you pay with a debit card, a so-called interchange fee is applied. This fee represents a percentage of the purchasing price which is paid by the merchant who receives that payment. It’s normally below the one percent range.
Since Binance has partnered with Visa, it will only receive a portion of those fees. The remaining fees will go into Visa’s pockets.
Apart from interchange fees, Binance also charges transaction fees for payments and ATM withdrawals of up to 0.9 percent. Lastly, if users need to reorder the card, a reissuance of $25 is applied.
Mining Pool
2020, furthermore, saw Binance launch two so-called mining pools with the purpose of mining Bitcoin and Ether.
Dubbed Smart Pool, the service enables miners to receive greater profits by auto-switching the hash rate to mine different currencies with the same algorithm.
Smart Pool utilizes the SHA256 function, which is an algorithm that is effectively used to validate transactions within a blockchain.
To partake in Binance’s mining pool, users will have to pay a 2.5 percent pool fee on Bitcoin and a 0.5 percent fee on Ether. The fee is applied to the cryptocurrency that is being mined while using Binance’s mining pool.
Investing
Binance began investing in other crypto and DeFi projects as early as 2018. The company has led a variety of funding rounds, but many of its investments are actually not disclosed.
Just like any investor, Binance makes money whenever it sells the company shares it purchased for a higher price. Dividend payments may be an alternative form of income in this scenario.
Binance Funding, Revenue & Valuation
According to Crunchbase, Binance has raised a total of $25 million across eight rounds of venture capital funding as well as initial coin offerings (ICO).
Notable investors include Sequoia Capital, Vertex Ventures, Black Hole Capital, Funcity Capital, and many more.
As a privately held company, Binance is not obligated to disclose revenue or valuation figures to the public.
Nevertheless, in an interview with Bloomberg, CEO Zhao expected the company to record between $800 million and $1 billion in profits (!) for 2020 (up from $570 million in 2019).
