COUNTER ARGUMENT: Binance 51% Market-Share is Bad

ATTENTION LONG READ

​

Recently there was a post about the dominant market-share Binance has and how that is a bad thing for crypto. Let me offer you a different view out the perspective of business enthusiast:

First, on the picture beneath here you can the massive market-share Binance has on the spot market, they also have this market-share on the derivatives market and other products:

​

Binance Spot Volume

Is this a problem?

​

If you look from a crypto point-of-view, yes, it’s bad. One of the core principles of crypto is decentralization. Centralized Exchanges goes against this principle, but a CEX with most of the market-share goes even harder against this principle. Also: Not your keys, not your coins. If you use a CEX, withdrawal your coins to your wallet.

But is it really?

​

As someone active in the stock market for many many years, I mostly look at MOATs. This means: a business ability to maintain competitive advantages over its competitors to protect its long-term profits. Also, companies with MOATs are usually hard to copy, have high barriers of entrance and require significant CAPEX. As someone who uses Binance among other exchanges, Binance value comes from its extreme low trading prices and diverse offering of products. How is Binance able to offer such extreme low trading prices? Binance has (but all exchanges have due to the business model of CEXes) operating leverage and with economies of scale you can therefor lower your prices and compete via this route. Operating leverage means that a company has fixed costs but due to the nature of the business model you can scale revenue with the same fixed costs and therefor leverage your more of your revenue into profits after a certain threshold.

To explain in simpler terms: If you were to build an exchange, you only need to build it once (Fixed costs), sure you have your marketing costs, operations and you need to upgrade your platform, but your platform only needs to be built once. The beauty is here that you can in theory get 1 million of revenue through your platform, but also 1 billion.

If you were to for example start a grocery chain, then there Is no operating leverage since you fixed costs rise with the number of supermarkets you own. Because more revenue means more supermarkets means more costs to operate. To illustrate how operating leverage works:

​

Operating Leverage Model

To achieve this operating leverage, you need to amass more revenue, so the leverage starts working in your favor. But Binance controlling most the market, they can simply then lower their prices than the competition who have not achieved these economies of scale. It’s a great MOAT since other exchanges will be forced to react, either lower prices as well or find other creative means of acquiring customers or they will lose market-share. Smaller exchanges won’t be able to keep up and therefore must shut down operations. And yes, many smaller exchanges did have to shut down this bear market. In my country, the Netherlands, two come to my mind instantly.

Besides forcing other exchanges to compete, with the amount of money Binance makes, it then makes it also easier to implement new products and features, further adding to the MOAT of Binance.

To conclude: Is Binance Market share really that worrisome?

​

Yes, from the point of view of decentralization.

No, from a business point of view. Binance competes on prices due to their scale and nature of the business and therefor other exchanges must be on the edge with prices as well or find other means of competing such as product offering and country specific marketing. Fierce competition ultimately benefits the customers.

​

Disclaimer: Yes, I use Binance, but 90% of the time I use Bitvavo and when I f around I use Kraken.

TLDR: Due to Binance scale, they can lower trading prices and therefor forcing other exchanges to react.