Experts told why the exchange pauses the main source of income

“New entrants are the main goal.” Why Binance cancels trading fees

01.09.2022

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6 min

The approaching transition of the Ethereum (ETH) network to the Proof-of-Stake (PoS) algorithm remains the focus of the cryptocurrency community. Leading exchanges are preparing for a major upgrade The Merge. Most of them have released statements of full support for the second-largest cryptocurrency upgrade, while at the same time hinting that they allow the listing of a likely offshoot of Ethereum in the form of the ETHPow fork, which will remain running on the Proof-of-Work (PoW) algorithm that is beneficial to miners whose equipment will be left behind.

If the fork does take place, Binance, the largest exchange by trading volume, plans to credit “unofficial” Ethereum tokens to everyone who has ETH coins on their balance sheet. However, that is not the only way that Binance plans to please existing and future users. Until September 26, trading in ETH paired with Binance USD stablecoin (BUSD) on the exchange will not be subject to fees.

Back in July, Binance in honor of its fifth anniversary canceled the fees on bitcoin (BTC) trading in pairs with the available on the exchange stablecoins, as well as with the ruble, hryvnia, euros, and other currencies. Since then, the market capitalization of BUSD has grown to $19 billion. The exchange's stablecoin, like its closest competitors USDT from Tether and USDC from Circle, for many serves as a store of value and insurance against cryptocurrency volatility, remaining the third largest market capitalization stablecoin.

“Binance regularly runs promotions with fee waivers for various trading pairs. Their purpose is to increase the liquidity of specific assets, increase interest to the exchange and activity of traders,” the founder of TOTHEMOON Group Vladislav Utushkin commented on the exchange promo, noting that the cancellation of trading fees for BUSD is timed to the upcoming Ethereum upgrade, but not related to the reduction of fees, which everyone had expected earlier. In his opinion, the exchange's promotion should rather be seen as a way to boost traders' activity after the vacation season.

“On the eve of the Merge upgrade, the exchange logically expects the increase in the trading volume in ETH, it is visible also by statistics: the index already jumped up strongly”, – cofounder of ENCRY Foundation Roman Nekrasov commented, referring to the CoinMarketCap data. According to the expert, many investors are buying coins in anticipation of a fork and airdrop of free EthPOW coins. The exchange wants to attract new users by offering them fee-free trading paired with BUSD. Amid the prolonged recession in the crypto market, the main struggle of crypto exchanges is unfolding for the users themselves. “Attracting new entrants is their main goal,” Nekrasov concludes.

Financial Times reporters make a similar argument in a recent article about the exchange: the decision to waive fees before one of the most anticipated events in cryptocurrency history underscores how Binance is using it as an excuse to attract new customers to the platform. This is especially important for the exchange after the crypto market crashed from its all-time highs, pushing away a significant portion of investors' funds. Changpeng Zhao, the head of Binance, previously told the FT that trading fees generate about 90% of the company's total revenue. According to Sipho Arntzen, an analyst at Swiss bank Julius Baer who was brought in by the FT as an expert, the cancellation of the trading fees may represent “somewhat of a ‘market grab’ strategy”.

Such tactics have shown themselves well in the case of broker Robinhood. Zero fees made investments more democratic – you can invest in the application, even if your account is only $1. In June, the service reported 22,9 million active users. Representatives of Binance confirmed to reporters that the exchange would “miss out on some fees,” but it “continues to have strong reserves.”

It is too early to talk about a trend of fee cancellation among centralized exchanges, Utushkin said. Today, transaction fees are the main item of income for cryptocurrency exchanges, the expert said, adding that one should not forget about listing fees, which are more than $50,000 for new projects, as well as fees for providing trading leverage for margin trading.

Binance's role as a leader has only grown over the current year. According to Cryptocompare, the exchange takes 55% of trades in pairs with fiat currencies, while its nearest competitors FTX and Coinbase cannot boast of even 10% of this market.

“Users are unlikely to bounce between different venues. More likely, they will stay at Binance and continue to trade other pairs there as well, especially fees of all major exchanges are comparable and are at the same level,” Nekrasov argues, adding that crypto exchanges are now looking for new business models in the light of the crisis, for example, by focusing on subscriptions.

During the crypto winter, exchanges are forced to optimize long-term strategies. Coinbase said nearly a fifth of its revenue in the second quarter came from additional services and subscriptions, with a net loss of $1,1 billion. “I think Binance is also keeping up with its competitor, especially since Binance already has the groundwork to create subscriptions – its BNB token,” Nekrasov said. The exchange's token can be used to pay for unique tariff plans or for additional discounts on fees, depending on trading volume.

FTX attracts new users in its own way. The exchange invests in traditional TV and offline advertising, as well as sponsoring a number of teams in major sports leagues, particularly baseball or American football. In addition, there are often headlines in the media that FTX is willing to buy out the assets of one crypto company or another, including direct competitors. The exchange, at least in hindsight, has a better financial situation. According to documents obtained by CNBC journalists, FTX saw a 1000% increase in revenues in 2021.

One of the experts interviewed by FT believes that Binance is closely watching the expansion of FTX in all sorts of areas, calculating how to more effectively strengthen its position. Nevertheless, according to Arntzen, the introduction of free trading on the exchange potentially indicates that in the short term, Binance does not count on the sharp growth of the market.

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