Block.one-backed AMM exchange "Bullish" valued at $9 billion, SBF sarcastically comments: "Really bullish"

The leading exchange Coinbase officially went public on Nasdaq in April this year, inspiring many exchanges, including Kraken, Bakkt, eToro, and Robinhood, who are now gearing up to go public. Now, another cryptocurrency exchange, Bullish, is set to go public.

According to the announcement, Bullish exchange declared last Friday (7/9) that it will go public through a SPAC merger. The company merging with Bullish is Farley Acquisition Corp (NYSE: FPAC), led by former NYSE President Tom Farley.

After the merger, Tom Farley will serve as the CEO of the new Bullish. The announcement states that the company is valued at a staggering $9 billion, having raised $600 million in trust cash at $10 per share, and $300 million in private investment from EFM Asset Management.

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It is worth noting that Bullish is not an old or well-established exchange. In fact, prior to May of this year, few had heard of Bullish, but investors should be familiar with the parent company behind Bullish, which is Block.one, the development company of the EOS public chain.

From their official website, Bullish appears to be a "cryptocurrency exchange" that provides AMM services. Furthermore, Bullish will collaborate with EOS to upload trading records to the EOS chain. However, do not misunderstand, Bullish is a truly "centralized" exchange. Bullish believes that compliance will allow AMM to attract more funds from traditional and institutional investors, increasing trading depth and allowing users to share in some of the transaction fees.

It is worth mentioning that the company's $9 billion valuation is not only from the $900 million raised through SPAC shares, but also includes an initial $100 million investment from Block.one, as well as 164,000 bitcoins and 20 million EOS tokens raised, valuing approximately $5.7 billion.

Is AMM Exchange Another MicroStrategy?

From the Bullish investment deck, it appears that the exchange is: 1 a centralized exchange, 2 requires KYC, 3 will collaborate with EOS, 4 adopts the AMM mechanism, with initial liquidity possibly provided by the exchange's reserve cryptocurrency, 5 allows users to provide liquidity;

However, the Bullish Exchange has not gone live yet and is still in testing phase. Although the technology seems "innovative," it is challenging for investors to correctly assess the valuation of such a company.

FTX founder Sam Bankman-Fried believes that the exchange's assets are valued at around 6 billion USD (5.9 billion USD in cryptocurrency + about 900 million USD raised through SPAC), so with a projected market valuation of 9 billion USD, this implies the exchange itself is valued at around 3 billion USD.

SBF wrote:

"Is Bullish worth a 3 billion valuation? Investors can judge for themselves."

SBF compared the liquidity that the AMM mechanism can provide. Currently, Bullish has around 5 billion USD in BTC and 1 billion USD in cash. Calculating with the traditional AMM formula "x*y=k," a trade of 5 million USD would move the price by about 1%.

For a similar trade pair, FTX's BTC-PERP would need an order size of about 900 BTC (approximately 30 million USD) to move the price by 1%.

8) What about that liquidity providing?

Well let's dive into an example.

They have ~$5B of BTC on hand, and ~$1B of cash.

Let's say they raise more and end up putting $1B each of USD and BTC in a BTC/USD pool, using x*y=k.

Then, the pool has ~$5m offered within 1%.

— SBF (@SBF_FTX) July 10, 2021

Furthermore, this calculation also includes the losses caused by "Impermanent Loss" (IL).

If Bitcoin were to rise by 75% this year (not an exaggerated percentage), holding a simple 1 billion USD/1 billion USD equivalent in BTC would result in having 1 billion USD + 1.75 billion USD worth of BTC; but by providing liquidity, due to IL, the funds would become 1.32 billion USD + 1.32 billion USD in BTC.

The difference is approximately 100 million USD (actually over 90 million USD).

Therefore, Bullish would need to spend nearly 100 million USD annually to provide 20% depth of FTX's BTC-PERP trading pair. In other words, to achieve FTX's trading depth, Bullish would need to spend close to 500 million USD annually.

"If all trading pairs need to achieve this depth, Bullish may need to spend 1 billion USD annually. This is indeed a substantial amount of money..."

Interestingly, in Bullish's profit and loss estimation, IL losses are not accounted for, and they assume a daily trading volume of 1 billion USD.

At the same time, SBF believes in another possibility, that Bullish might want to become a company similar to MicroStrategy. However, if that's the case, out of the 9 billion valuation, only around 6 billion USD are in cryptocurrency, meaning investors would be buying Bullish's cryptocurrency at a 50% premium.

16) Create a company, put $6B of crypto in it, SPAC it at $9B, and now people have a way to buy crypto with their brokerage accounts at a 50% premium.

Maybe they will!

— SBF (@SBF_FTX) July 10, 2021

"Creating a company holding 6 billion USD in cryptocurrency, using a 9 billion USD SPAC valuation, so now investors can buy the cryptocurrency at a 50% premium through the account. Maybe investors will actually do that!"

"I think Bullish will show everyone how bullish we are!"

Purely SBF's Personal Opinion

However, this argument is SBF's personal opinion and is for reference only. In reality, if more external institutions provide liquidity for AMM, share IL, and with the income from fees as liquidity providers, it may not necessarily be a losing business. After all, well-known Silicon Valley investor Peter Thiel's two venture capital funds, Galaxy Digital, and international investment bank Nomura have all joined the investment ranks.