Summary Binance, a leading cryptocurrency exchange, faces a $4.3 billion fine and CEO CZ's resignation following a settlement with the DOJ. Binance's exchange balances appear over collateralized - though caution with these sorts of things should always be considered. BNB valuations are higher than peers and DAU share seems to be moving to Tron. I think things get uncomfortable quickly if BNB breaks $200. I'm avoiding it. In what may not come as surprising news, top global crypto exchange Binance has reached a settlement with US regulators that will result in a $4.3 billion fine and the resignation of CEO Changpeng "CZ" Zhao. When I last covered the native asset of Binance's blockchain (BNB-USD) in July, I called the coin a "sell" and cautioned crypto investors about buying the dip down to $238. That sell call proved prescient as BNB fell to $205 shortly after the article was posted. Data by YCharts Even after a sizeable rally in BNB from $205 up to $270 more recently, BNB has still lagged the rallies seen in the native assets of large competing layer 1 smart contract chains like Ethereum (ETH-USD) and Tron (TRX-USD). Though Tron is the clear standout here and BNB has moved roughly in tandem with ETH. In this update, we'll look at some of the metrics related to Binance the blockchain network and Binance the exchange in an effort to assess if the worst might be over for BNB. Binance Proof of Reserves Given the fact that Binance settled on an enormous $4.3 billion fine, proof of reserves should be of particular interest going forward. To give some context as to how large this is, fellow crypto exchange Kraken settled with the SEC for $30 million earlier this year. However, Binance is a far larger exchange with more spot trading and a larger pool of capital. Binance PoR (Nansen) According to the addresses tracked by Nansen, Binance's exchange assets are slightly above $65.7 billion as of November 21st. At just 4.4% of total assets, Binance is not overly reliant on BNB token for reserves; this would be in contrast to what happened last November during the FTX/Alameda blowup. Looking at Binance's own proof of reserves , we can see each asset in the report is overcollateralized with stablecoins Tether (USDT-USD) and Binance USD (BUSD-USD) alone combining for over $3.2 billion in fund surplus: Asset Customer Net Binance Net Ratio Surplus Value BTC 584,659 609,311 104.2% $909,614,333 ETH 3,916,289 4,119,860 105.2% $405,432,368 BNB 31,216,990 34,780,091 111.4% $860,702,564 USDT 15,270,122,379 18,146,029,534 118.8% $2,875,907,155 BUSD 835,359,336 1,116,058,373 133.6% $280,626,897 Source: Binance Factoring in Binance's Bitcoin (BTC-USD) and ETH assets, the company could pay the DOJ fine in full today even though it doesn't have to. This may be a big ask, but if we assume Binance's net figures are correct, the "bank run" scenario may not be likely based on what is publicly available. However, I want to make it clear that I personally advocate for self-storage over keeping large crypto balances with centralized exchanges. And I think it's very important that crypto market participants pay attention to Binance exchange flows in the weeks and months ahead. Exchange assets (CoinGlass) According to data from CoinGlass, the 24 hour crypto flows out of Binance are just under $567 million at this point in time. While this is not a small amount, adjusted for Binance's total assets on exchange, the recent outflow is roughly in line with OKX and Bitfinex. Month over month, Binance's net flows are still positive by $2.2 billion. Network Health From an investment standpoint, Binance's exchange balance and BNB positions are just half of the story. As a smart contract blockchain asset, BNB is both a governance and a gas token that theoretically benefits from the network effect of growth in chain usage. The token has also been deflationary through quarterly token burns going back to Q4-21: BNB Circulating Supply (Messari) From a DeFi perspective, the Total Value Locked story for BNB Chain leaves a bit to be desired: BNB TVL (DeFi Llama) At 11.2 million BNB locked, Binance Smart Chain has endured a 71% reduction in TVL. This is certainly not unique to Binance as most layer 1 chains have seen large declines in DeFi TVL. But by percentage, it's the weakest performance among the top 3 chains by TVL, of which Binance ranks third after Ethereum and Tron. Daily Active Users (Artemis) That said, Binance still has one of the top user bases judging by its nearly 1 million daily active users. This would put BNB ahead of Ethereum or Solana (SOL-USD) but notably behind Tron - which has seemingly taken share from BNB and Solana over the last two years. Finally, looking at network development, we see a big reduction in core developers and code commits over the last year: Core Developers (purple) vs Code Commits (green) (Token Terminal) This is certainly not unique to just Binance but with core devs getting chopped in half since March and code commits evaporating, it's not a pretty picture. Valuation As a smart contract blockchain, two of the valuation metrics we can look at are market cap to total value locked (or MC to TVL) and fully diluted price to fees. The MC to TVL ratio takes the total value of all of the BNB tokens and divides that market valuation by the value locked in the DeFi protocols on the chain. There is no standard threshold for when an MC/TVL ratio is considered too high, but Binance's is higher than peers: TVL Rank Chain TVL MC/TVL 1 Ethereum $24.486b 9.56 2 Tron $8.036b 1.06 3 Binance Smart Chain $2.842b 12.3 4 Arbitrum (ARB-USD) $2.091b 0.59 5 Polygon (MATIC-USD) $803.12m 8.47 Source: DeFi Llama BSC is the only chain in the top 5 with an MC/TVL ratio in double digits and after Solana's super rich 40.4 MC/TVL, Binance has the largest MC/TVL ratio in the top 10 DeFi chain rankings. That said, price to fees may be a more straightforward way to value these assets since smart contract chains may not necessarily be optimized for DeFi protocols. Fee Rank Chain Annual Fees ($m) Price to Fees 1 Ethereum $2,086.9 100x 2 Tron $899.1 7x 3 Bitcoin $430.7 596x 4 BSC $179.8 341x 5 Solana $15.5 1,098x Source: Token Terminal However, even here, Binance isn't necessarily cheap at 341x fees. When including all DeFi protocols in addition to the base layer chains, the median fully diluted price to fees ratio is 47x though base layer gas tokens generally trade at higher multiples. The more natural comp for BSC is likely Ethereum and BNB is 3 times more expensive based on fully diluted P/F ratio. Valuation isn't the only risk to consider. BNB's nearly 3-year long floor of $200 may be in jeopardy if the chain's usage continues to decline. Risks As I've said in the past with BNB, it's difficult to know exactly how much exposure Binance employees have to the token. This is very much a speculated risk from my April BNB article , but it's worth mentioning again: it has been estimated by independent analysts that Binance actually controls far more BNB than its proof of reserves here indicates; possibly as much as 80% of BNB's circulating supply is under Binance control either directly or indirectly through employee holdings One of the things that I'd be very concerned about if I were a BNB holder is how many more times BNB's $200 support can be tested before it finally gives way. BNB Weekly Chart (Investing.com) The problem for dip buyers down here is there is very little price discovery between $50 and $190. So if support in that area does give way, BNB could fall very far, very fast. Binance is apparently a deep-pocketed business, but the company has an 11-figure settlement it now has to worry about paying and a blockchain network that appears to be losing DAUs to Tron and other networks. Summary Once again, I'd fight any urge to buy BNB even after the settlement announcement. On the surface, Binance looks like it can handle these payments with its own reserves but we'll likely get a better sense for that in the months ahead. I think the broader takeaway from all of this for the crypto community is somewhat positive. We seemingly go through this every cycle. Crypto is an easy area to make a lot of money quickly and that attracts a certain type of character. In the last 12 months, we've seen Sam Bankman-Fried's fall from grace to a guilty verdict. It's somewhat fitting that a year later CZ now finds himself in the spotlight for the wrong reasons. In the last two years, this industry has endured Terra Luna (LUNC-USD), 3AC, FTX, Celsius/BlockFi/Voyager going under, miner bankruptcies, Genesis/Gemini, concerns about DCG, an antagonistic SEC, and now the largest exchange in the world settling with the DOJ. Yet Bitcoin is still above $36k. I think there's a signal there. Flight to quality.
