Data analysis of exchange risks, exchange fund reserves, and the valuation of platform tokens
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The FCoin thunderstorm incident has attracted widespread attention. In the previous article, we exclusively analyzed the potential victims of this incident, which may exceed 2000 people, with an average loss of over 25 BTC per person.
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This article by PAData further analyzes the reserve of assets on exchanges and the coverage of investor protection funds on the chain, and attempts to explore the operation of exchanges through the valuation analysis of platform tokens, in order to observe the general risks of exchanges.The total amount of investor protection funds on exchanges is less than 10% of the on-chain balanceThe reason for FCoin's collapse is the inability to pay users' withdrawals from the fund reserve. In fact, investors can examine the fund reserve of the exchange from the on-chain balance of all addresses owned by the exchange.According to the statistics from Chain.info, as of February 19, the exchange with the largest on-chain BTC balance is Coinbase, reaching around 968,100 BTC, far exceeding other exchanges. In addition, Huobi and Binance reached 378,700 BTC and 250,500 BTC respectively, while Bitfinex, OKEx, Bitstamp, Kraken, and Bittrex all exceeded 100,000 BTC.Further combining the 24-hour trading volume statistics from CoinGekco on February 20, the exchange with the highest daily standard BTC spot trading volume is Binance, reaching nearly $1.067 billion, followed by Coinbase at $236 million. Bitfinex, Kraken, and Bitstamp also surpassed the billion-dollar mark.If we compare the on-chain BTC balance of exchanges as of the closing price on February 19 with the daily standard BTC spot trading volume, we can see that the on-chain BTC balances of exchanges are more than double the daily standard BTC spot trading volume, indicating that even with an equal amount of futures trading volume considered, the on-chain fund reserves of these exchanges are sufficient to cover.Interestingly, the exchange with the lowest multiple of on-chain BTC balance to daily standard BTC spot trading volume is actually Binance, which has a ratio of only 2.25. Huobi, Coinbase, and Bittrex all exceed 35 times, while OKEx, Gate.io, and Bitflyer are also over 10 times.In addition to comparing the fund reserve of exchanges by the on-chain balance and trading volume, a more direct method is to analyze the size of the investor protection fund established by the exchange. According to limited data, Huobi and Gate.io have explicitly disclosed the size of their investor protection funds in platform tokens as 50.0756 million HT and 44.7471 million GT respectively, which, based on the closing price on February 19, is equivalent to approximately $240 million and $28.3792 million, accounting for about 6.62% and 9.27% of the on-chain BTC balance of the two exchanges respectively, but both exceeding the 24-hour BTC standard spot trading volume.Apart from Huobi and Gate.io, according to public data, Binance has been allocating 10% of its trading fees as the SAFU investor protection fund since July 14, 2019, but the size of the SAFU fund has not been officially disclosed.There are not many exchanges that establish investor protection funds, and even if they do, the size of the funds only accounts for a small part of their asset size. Exchanges usually set a maximum limit on the use of the investor protection fund, and the total value of the fund also depends on the value of their platform tokens. If a situation arises where the platform is unable to pay out funds, then the exchange is already on the brink, and at that time, will the platform token still hold value?Market valuation of exchanges may be higher than their actual operational capabilitiesPlatform tokens are an important aspect of the competition among various exchanges, and their value is considered an important reference indicator for measuring the operational capabilities of exchanges.Currently, platform tokens have become an important concept in the top assets. According to static market value statistics on February 18, BNB is currently the highest market value platform token, reaching $3.574 billion. Following that, OKB and HT both have a market value of over $1 billion, with LEO also approaching $1 billion. These four platform tokens have entered the top 30 in terms of market value ranking.Most platform tokens currently operate on a deflation model, gradually reducing circulation through platform repurchases and burns to maintain or increase the value of the tokens. After the start of 2020, there has been a wave of token burns in the platform token space.On February 10, OKEx announced the burning of the remaining 700 million OKB tokens that were not issued, and by 11:00 on February 11, OKB had already surged by 46%. Subsequently, ZB exchange also announced that they would abandon and burn all 293 million ZB tokens held by the team, as well as all 107 million ZB tokens from the user protection fund. By 11:00 on February 11, ZB had seen a 24-hour surge of 18.85%. On the evening of February 10, the collapsed exchange FCoin also announced the burning of all 720,404,905.38 FT tokens held by the team, resulting in a 24-hour increase of 10.42% for FT.Aside from this unconventional wave of burns, exchanges typically conduct burns of platform tokens on a regular basis, with most doing so on a quarterly basis, while some do it monthly or weekly.PAData has compiled the historical burn data of major platform tokens in 2019 and found that ZB.com was the exchange with the highest amount of burned platform tokens in 2019, burning approximately 192 million ZB tokens in total. Following that, MXC burned around 47.2883 million MX tokens, and Huobi burned 39.8797 million HT tokens.By estimating the market value at the time of burning, in 2019, Huobi had the highest total burn amount, burning tokens worth approximately $127 million HT in total, followed by Binance, which burned tokens worth around $114 million BNB. The burn amounts of these two exchanges far exceeded those of other exchanges.However, the total estimated burn amount for the year cannot be directly compared, as each exchange has different sources of funds for repurchasing and burning tokens, leading to different total funds available for repurchase. Based on an analysis of the burn rules of each exchange, the main sources of funds for repurchasing and burning platform tokens include "trading fees," "revenue," "profits," and "equity income (voting listing/discounted new listings/UP sales)," among others.These various sources of funds for repurchasing and burning tokens have complex relationships with each other. In general, the funds come from all or part of the overall revenue of the exchange, meaning that the total burn amount can be entirely or partially equivalent to the exchange's annual revenue. Burn funds from "revenue" or "profits" can be considered as the total burn amount being entirely equivalent to the annual revenue, while others can be seen as the total burn amount being partially equivalent to the annual revenue. This sets the reference range for subsequent valuations.If we use the total annual burn amount/annual burn quantity as the platform token P/E ratio for 2019, that is, calculating how much each burned platform token in 2019 is equivalent to the exchange's revenue in full or in part, and comparing this with the current token price, we can see that out of the 9 platform tokens within the statistical scope, 6 tokens have a current token price higher than the P/E ratio of the burned tokens in 2019, meaning that the current valuation of these 6 tokens is higher than the operational capabilities (revenue) of the exchanges in 2019.Notably, spurred by the news of burning 700 million OKB tokens, the current token price of OKB is now 3.055 times the value of the tokens burned in 2019, the highest among all exchanges. Additionally, the current token prices of HT, BNB, GT, ZB, and MX are also higher than the value of the burned tokens from the previous year.Conversely, the current token prices of BIX, KCS, and LEO are all lower than the value of the burned tokens from the previous year, indicating that the current valuation of these 3 platform tokens is lower than the operational capabilities (revenue) of the exchanges in 2019.If we use another valuation method prevalent in the market, the valuations of various platform tokens differ significantly. Calculating the market-to-burn ratio by total platform token market value/annual repurchase burn amount, we can observe that the market-to-burn ratios of LEO, BNB, OKB, GT, and BIX are all above 10, with LEO and BNB exceeding 45 and 31 respectively. The stark differences in these two valuation results may be due to the fact that the market-to-burn ratio calculation overlooks the source of the annual repurchase amount, meaning it can be seen as the degree of revenue or profit.Regardless of the valuation method used, the current market valuation of most platform tokens is relatively high, indicating that the market still has confidence in the operational capabilities of exchanges. However, it must be emphasized that valuation is the result of market trading, not the reason for trading, as only when the token price has risen or fallen can investors see changes in valuation.In the long run, the valuation of platform tokens depends on the development capabilities of exchange businesses. Only when businesses develop further can platform tokens have more application scenarios and consequently more utility value.Based on incomplete public data, the main uses of platform tokens currently are for trading and equity certificates, both of which are closely related to the exchange's core trading and derivative businesses.
All 10 platform tokens within the statistical scope can be used for fee deductions/discounts, 8 can be used as certificates for participating in private placements, and 5 can be used as certificates for receiving airdrops/rebates/dividends. Of note, Kucoin's platform token KCS can be used for other applications within its ecosystem. With exchanges entering the public chain market, platform tokens with expected public chain support such as BNB, HT, OKB, GT, and others are expected to have more room for imagination in terms of ecosystem applications.
