Author: 0x Loki
1. Second-Stage Growth Model for Platform Coins
Previous tweets mentioned that a major pitfall of exchange platform coins is not to rely too much on P/E (Price-to-Earnings ratio). Behind this is the dividend growth model. We consider token buybacks, dividends, token airdrops, and fee deductions as dividends. In theory, the valuation of exchange platform coins should be proportional to dividends. According to this valuation logic, the investment value of HT>BNB>OKX in 2020.
But obviously, the result is wrong. The reason is that looking at P/E alone is like using a first-stage valuation model, while in reality, at least a second-stage model should be used. This is because besides current earnings, future growth rate also plays a decisive role. Of course, the cryptocurrency market has typical bull and bear cycles, so the actual model will be more complex. But in general, the growth rate will have a decisive impact on valuation and value regression.
That is: the valuation of platform coins depends on the current value capture capability + growth potential.
2. The Real Driving Force of Platform Coins in Bull Market
So the next question is: what has a decisive impact on growth rate? The answer is assets.
In previous tweets, I mentioned that the best time to buy platform coins is in the early stage of a bull market. Some people think this statement is meaningless, but the "early stage of a bull market" here does not need to be so precise. This bull market does not refer to BTC at $6,000. To put it more directly, a good buying point for platform coins will occur after BTC stabilizes at its all-time high.
The logic behind is simple. Exchanges' profits come from trading and asset sinking. However, real trading demand often accompanies asset explosions. When BTC rises from $10,000 to $30,000, exchanges cannot make too much money because most of the trading is still limited to BTC. But the real trading volume comes from the explosion of assets. In 2017, it was ICOs, in 2020-2021, it was DeFi Summer, Gamefi, and new public chains.
Speaking of this, BNB's success is no longer surprising because between 2019-2020, Binance took a leading position in the competition at the asset level. Specifically, there are two pillars: Binance Labs and Binance Smart Chain (BSC). If you have been paying attention to Binance's IEOs since 2019, you will find that these projects are not illogical, but interconnected, capable of constructing network effects. The most typical sign is that I clearly remember that more than half of the cooperation partners announced in one of Binance's IEOs were previous IEO projects. And this was just the beginning. During this time, Binance Labs gradually took the stage (established in 2018).
At this point, the gears of fate have already begun to turn. IEOs and investments targeted by Binance will become one of Binance's biggest wealth in the subsequent bull market.
Afterwards, in the DeFi Summer of 2020, objectively speaking, almost all exchanges emptied the first round of DeFi Summer to varying degrees. However, Binance quickly launched BSC, which was essentially a spillage of the ETH demand at that time. At this time, most employees of some peer companies and even some executives didn't know how to use a wallet on the blockchain.
With the support of Binance Labs and BSC, BNB has achieved unprecedented success, transforming the advantage of asset layout into the right to issue assets in a bull market. The reason is simple: as a trader or project party, how do you choose when the highest quality and most wealth-effect assets are first issued or become the main trading pair in BN? This is how the growth flywheel is realized:
More users, stronger wealth effect, and higher quality assets
FTX, relatively speaking, is also quite successful, with a similar path to Binance: Solana + Alameda/FTX Ventures; Huobi has also achieved significant results with this strategy, and even once surpassed BSC, but unfortunately did not turn out as expected for various reasons. OKX was clearly at a disadvantage in this stage.
Here's an unrelated point. Although there is much controversy in the market regarding Binance's investments and listing choices, from my personal experience, Binance Labs values long-term value more than short-term gains. This is manifested in Binance Labs' willingness to lead investments and invest larger proportions, showing relative insensitivity to valuations. This is contrary to many "VCs" who pursue low valuations, follow-on with smaller sizes, and wish to unlock quickly. In fact, in many cases, Binance Labs will actively request the project party to extend the vesting period for tokens allocated to investors, including themselves.
As for a certain exchange whose founder has gone in and is associated with VCs, you may find that their investment targets did not perform well in the end. This is because they enter the Pre-Seed round with very loose terms for some projects. I won't go into details here, but the outcome is clear.
Three, The Slowdown in Growth and Regulatory Pressure in a Bear Market
The second phase of the two-stage dividend growth model will enter a stable state, which means that high growth is inevitably unsustainable. There are many reasons: the increase in the base leads to an inevitable decline in growth, management becomes more difficult, enterprise efficiency declines, and "dumping" against the Top 1, etc.
One additional point to mention here is the "Impossible Triangle" for exchanges. This theory was proposed by me previously when analyzing the on-chain gambling track, but it also applies to this framework for cryptocurrency exchanges. In simple terms, exchanges have economies of scale, and the larger they are, the greater their ability to capture value, but choosing compliance + scale will inevitably require sacrificing some profit, while choosing scale + profit will inevitably come at the expense of compliance.
This is also the problem that Binance is currently facing. Perhaps many other exchanges have lower compliance levels than Binance, but they are not large enough in scale, so they face less regulatory pressure. Besides regulatory pressure, we can also see that Binance is under some growth pressures at the moment, as evidenced by rumors of layoffs, copy trading, and the requirement for some project parties to introduce business operations. Of course, these pressures will not fundamentally change the fundamentals of Binance. They are just inevitable results of being large enough in scale + in a bear market + employing a long-term aggressive strategy.
IV. Offensive Strategy vs. Defensive Strategy
In contrast to Binance's aggressive strategy, OKX represents a typical example of a "defensive strategy." We can see that from investment to listing to operation, Binance has always emphasized [education], which is a manifestation of its growth anxiety. Binance has already captured as much existing market as possible and the only way to achieve high and sustained growth is to attract external flow.
In contrast, OKX has been doing the following:
(1) Very few listings
(2) Investing heavily in asset management: high-interest savings subsidies, shark fins, structured products. These products are all designed to attract existing users and assets.
(3) MPC wallet, AA wallet, NFT aggregation market, the integration of CeFi and the on-chain world. The purpose of these products is to retain users within OKX's ecosystem amid the trend of chainization.
Personally, I believe this defensive strategy has been very successful during the 2022-2023 bear market period. OKX has gained users and reputation, and this success can partly explain the performance of OKB's price.
V. Returning to the Starting Point: Are Platform Coins Worth Holding?
If you ask me which platform coins I am most optimistic about or which platform coins have the best fundamentals, I can answer:
(1) BNB
Binance is facing strong regulatory pressure and high growth pressure, and BNBChain has also underperformed recently. However, the fundamentals of BNB have not fundamentally reversed. Binance still has a leading position, asset-level advantages, the strongest profit-making ability, and the imaginative space brought by opBNB and Greenfield.
(2) OKB
OKX is one of the best-performing exchanges in the bear market phase, especially its defensive strategy has achieved significant success, and this defensive strategy can also switch to an offensive strategy when the bull market comes. Defense does not mean forever.
(3) BGB
BGB is one of the few exchanges that persist in an offensive strategy during the bear market. In addition, BGB also has the horizontal ecological advantage of original Bitkeep wallet, ForesightNews, and Forsights Ventures. (Speaking of which, Foresight Ventures is also one of the best Asian Crypto VCs in my opinion).
But if you ask me if I have bought BNB/OKB/BGB, I can tell you very clearly that I haven't bought any, and I don't plan to buy at the current price for the foreseeable future. Here are three reasons:
(1) The valuation is a bit high.
(2) Valuation methods have failed. One interesting thing is that for these three platform coins, because we don't know the true circulating supply (excluding the portion held by the founders and the platform itself), a typical view is that most of the BNB was repurchased before the bull market, most of the OKB was repurchased after the Shanxi incident, and BGB has always maintained a high control state since its issuance. So, for these three platform coins, any valuation model has completely failed.
(3) As mentioned earlier, platform coins do not directly benefit from the bear-to-bull transition, but rather benefit from the asset explosion in the early to mid-stage of the bull market, which is still far away from us. The opportunity to get on board is not going to close immediately.
An unconventional view is: buying 200 U of BNB now is not more cost-effective than chasing after 800 U of BNB in the next bull market, because you need to consider the risk-reward ratio and opportunity cost. What if the bull market lasts longer? What if Binance encounters problems or gets flipped during this period? What about the returns from other investments you participated in or the losses from staying in a cash position to avoid EV?
As for other platform coins, honestly, I use them less or know less about them, but overall, I don't think these platform coins will be good targets at this stage. This is the mid-term period of liquidity exhaustion and the most painful period for exchanges with not-so-strong profit-making ability. Sometimes, surface data does not guarantee absolute security, like Dragonex and Fcoin in the previous cycle. Sacrificing some potential gains to preserve capital is not a bad thing.
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