Cryptomillionaires can not yet sit back

When Changpeng Zhao first heard about the existence of bitcoin during a poker game with some friends in 2013, he sold his apartment in Shanghai as fast as he could. He invested the profits in the cryptocurrency.

Soon, ‘CZ’ began working for prominent crypto projects, including the groundbreaking service provider Blockchain.com. At the time, the company was working on ‘wallets’ that were available to the public, the digital wallets where you store cryptocurrencies securely and which are used to send and receive many digital currencies. He learned the tricks of the trade at OKCoin, one of the first bitcoin exchanges in the world that mainly served the Chinese market from San Francisco in spot trading between regular money and cryptocurrencies.

In 2017, Zhao set up its own exchange platform Binance, fully focused on crypto-to-crypto trading. His ambition: to build a safer, more reliable and faster version than the hundreds of platforms built daily at the time, and entice the user with slightly lower trading costs. Within a year, Zhao was a billionaire.

Binance is today the world’s most popular platform for trading bitcoin, still the largest and most well-known cryptocurrency, and alternatives such as ethereum and tether. The company facilitated more than $ 9.5 trillion in transactions last year. That’s about two-thirds of the total trading volume handled by centralized crypto exchanges, according to figures from research firm The Block Research. The exchange office earns a percentage of 0.1 percent on each transaction. It has also rolled out various services, such as a special payment card for cryptocurrencies, and launched its own cryptocurrency.

Zhao, now 44, falls into the category of cryptocurrencies because of its success: entrepreneurs who have made a fortune in a short time trading cryptocurrencies. This trade gained momentum during the pandemic, especially among young investors who want to tackle their lockdown boredom – a market that crypto advertisers eagerly dived into.

Explosive growth

While the strong price fluctuations on cryptocurrencies often cause great uncertainty for investors, entrepreneurs like Zhao benefit from the trading driven by this. Rising price or free fall: Crypto trading continues. “Over the past three years, the cryptocurrency market has exploded from $ 100 billion in total market value to its $ 3,000 billion peak last year,” said Bert Slagter, an analyst at LekkerCryptisch, a cryptocurrency knowledge platform and author of the book. Our money is ruined† “Platforms like Binance benefit from network effects: the larger they are, the more services they can develop and the more liquidity there is.” Their revenue model is largely based on user activity, Slagter explains. “For example, in the form of transaction costs. The more trade, the more revenue. And with these large parties, it runs into billions. “

Since the start in 2017, the number of active Binance users (at least two transactions per month) has increased to 28.6 million in October 2021. Binance itself does not disclose figures on a regular basis, but now the annual turnover of Bloomberg is estimated at. at least $ 20 billion with an annual profit of about $ 1 billion.

Binance is not the only crypto service provider that successfully operates in the turbulent crypto world in a relatively short time. The US trading platform Coinbase, founded in 2012, has experienced a similar growth spurt in recent years. Coinbase also offers cryptocurrencies, though the trading house with about fifty currencies is much more selective than Binance, which offers more than six hundred coins. The number of active Coinbase users now exceeds 9 million.

The big man behind Coinbase is 39-year-old Brian Armstrong, a former software developer at the rental platform Airbnb. He recognized early on that cryptocurrencies had the potential to disrupt the payment industry, provided the less technical user could more easily exchange or transfer the coins. For example, Coinbase focuses on short, clever explanatory videos – sometimes starring Armstrong himself – with the novice crypto investor (“this is how you create a crypto wallet”).

The key to the success of the trading platforms is to provide security, says bitcoin developer Sjors Provoost, who worked for Blockchain.com from 2014 to 2017. “The most important thing is that customers do not lose their cryptocurrencies. It can happen when a trading platform itself is robbed, as happened with the well-known bitcoin exchange MtGox, but also because customers become victims of cybercriminals. ”

Go to the fair yourself

Traditional investors can now also contact Coinbase. During the crypto hype of spring 2021, the trading platform was the first of its kind to be listed on its own. Since then, you can invest in crypto without buying it yourself. The listing provides an interesting insight into the operational management of the platform, which is now required to publish figures. In 2021, Coinbase’s total trading volume was $ 1.7 trillion, generating $ 6.8 billion in transaction revenue, or 0.41 percent per share. transaction – significantly more than the competitor Binance. Also interesting: The company wrote red numbers in the first quarter of 2022, when the volatility of cryptocurrencies was less.

Brian Armstrong owns about 20 percent of Coinbase’s outstanding shares. The value of that interest fluctuates sharply because the stock price on Coinbase appears to be as volatile as on the cryptocurrencies that the company trades. Although that price is currently more than 80 percent lower than at the time of launch, the listing made Armstrong a billionaire in one fell swoop.

The career of the mere 30-year-old Sam Bankman-Fried can be compared to this. He is the founder of the trading platform FTX, which has been operational since 2019. Unlike Binance and Coinbase, FTX focuses more on derivatives: investment products derived from cryptocurrencies that allow you to speculate on a rise or fall in a price, such as futures and opportunities .. Some of these products are risky for individuals due to their leverage – which can greatly increase profits but also losses. For this reason, they are banned in some countries, such as the Netherlands. Reason for Bankman-Fried to keep an office in the Bahamas where there is less supervision and taxes are largely absent.

The fact that derivative investment products are not allowed everywhere does not stand in the way of investors’ belief in FTX. The fast-growing derivatives exchange raised no less than $ 900 million last summer from investors, who estimated the value of the very young company at $ 18 billion. Which instantly made Bankman-Fried one of the richest twenty-somethings ever.

The future is uncertain

Yet the future is uncertain for this new generation of cryptocurrencies. Will their trading platforms remain popular, or will there be only one winner? What will be left of their assets after the collapse of certain cryptocurrencies? On Monday, there was again great unrest in the crypto markets due to problems in the ‘bitcoin bank’ Celsius, where the price of both bitcoin and Ethereum fell sharply. A month ago, the same thing happened after the collapse of the cryptocurrency Terra, which was seen as a stable currency. And how is regulation evolving worldwide? For example, the EU is one of the first international regulators to work on crypto-trade legislation.

Binance, registered in the Cayman Islands, was already at odds with regulators in Asia, the United States and Europe. It was forced to prevent US customers from avoiding regulation and was forced to stop selling shares linked to shares in Europe. tokens† Although Coinbase is publicly traded, compliance with stricter legislation and anti-money laundering will almost certainly lead to higher costs and therefore lower margins. And in mid-May – just after the collapse of ‘stablecoin’ Terra and a bitcoin crash – FTX suddenly announced that in addition to hedged coins and derivatives, the platform will now also offer traditional stocks and exchanges (ETFs). ). trackers), first on the market. USA A sign on the wall?

“Big companies are always finding a way to get favorable rules for them,” says bitcoin developer Provoost. “The question that I think is more important is: what’s left of ‘crypto’? Will you soon only be able to buy coins on Coinbase if the blockchain is fully regulated – and therefore not decentralized at all? And you will no longer be allowed to to send coins to your own purse that the anti-money laundering organization FATF would like? ”

In short, the crypto-rich are far from resting on their laurels.

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