It’s no secret that Changpeng “CZ” Zhao, CEO of the leading cryptocurrency exchange Binance, is one of the industry’s raging bulls.
Even so, he doubled down on April 2, announcing that Binance has bought CoinMarketCap, which is far and away the best-known and most heavily trafficked site for tracking the price of cryptocurrencies and other industry data.
Founder Brandon Chez will be stepping down as chief executive of CoinMarketCap, with Chief Strategy Officer Carylyne Chan stepping in as interim CEO.
According to The Block, which broke the story , Zhao spent as much as $400 million on CoinMarketCap.
The companies declined to comment on the price. But if true, that’s a princely—if not laughable—sum, especially during a market crash of such historic proportions that investments and acquisitions in nearly every industry have dried up.
Unsurprisingly, reports have already spread that the transaction did not include cash, but was a combination of stock in Binance and its binance coin (BNB) tokens, which are currently the ninth biggest cryptocurrency by market cap. BNB is down by more than half over the last six weeks, plunging from $4 billon on Feb. 15 to $1.9 billion on April 1, according to CoinMarketCap itself.
As for the stock, Binance’s value is hard to assess. Industry insiders have told Modern Consensus that Binance has been notched at $15 billion, an extremely unlikely valuation on the best day, let alone in a post-coronavirus economy. On the other hand, in October 2019 the Chinese research firm Hurun valued Binance at just $2 billion—which seems low given that Binance claims to burn BNB tokens worth 20% of its profits quarterly. At that rate, Binance has pulled in $1 billion in profit in the last two-and-one-half years.
That $400 million figure seems even less likely since it’s not clear what CoinMarketCap adds to Binance’s business or bottom line, other than some ad sales.
Indeed, the statements issued actually seemed to go out of their way to suggest the acquisition adds nothing concrete to Binance’s business other than furthering Zhao’s somewhat vague long-term goal of becoming “the infrastructure services provider for the blockchain industry of tomorrow.”
The release was quite clear in pledging that CoinMarketCap and Binance will “maintain a strict policy of independence from one another” after the merger, particularly in regard to the listing of Binance’s BNB token, currently the ninth-largest cryptocurrency by market cap.
“Binance has no bearing on CoinMarketCap rankings, while CoinMarketCap has no influence over Binance’s operations,” it said.
Chan told Modern Consensus much the same thing via email. “Remaining neutral is absolutely key to the business in the long run, so we are prepared to keep it this way,” she said. “CMC will continue to operate as an independent entity. Our team will continue to apply our methodical and measured approach to all matters going forward.”
She added: “Trust is key to CMC’s brand and business.”
Zhao agreed. “For many, CoinMarketCap is the landing page of our industry and like Binance, has built its community around user trust,” he said in the announcement.
That pledge has raised enough skepticism that just two hours after this morning’s announcement, CoinMarketCap had to tweet out: “To clarify, CoinMarketCap is not going to start charging for listings. Please do not believe hearsay or unconfirmed media reporting.”
That trust was notably lacking on Twitter, with CoinMarketCap competitor CoinGecko getting a lot of positive attention.
And, the potential conflict of interest was jumped on by Binance competitors.
MatrixPort sales head Eugene Ng tweeted, “Who would ever trust @CoinMarketCap after this… just defeats the purpose of having a balanced and neutral index aggregator.”
Bitfineon CEO Jared Grey pitched in with, “In the traditional market this merger would have been struck down as anti-competitive….”
Is CoinMarketCap worth it?
So what did Zhao actually buy? One good answer he gave to that question is, users that he may be able to channel onto Binance. “CoinMarketCap has more users than any other product in the crypto space,” Zhao told CoinDesk. “[I]t’s a very valuable platform.”
Beyond that, CoinMarketCap has a substantial first-mover advantage, although its reputation is also somewhat tattered.
While it is in many ways the standard reference for crypto prices and market data, its list-anything-without-judgement policy has led to widespread concerns that many less-reputable exchanges’ data is fraudulent, if not fantasy, enabling the industry’s rampant market manipulation.
That came to a head on March 21, 2019, when Bitwise Asset Management released a study created for the U.S. Securities and Exchange Commission that found 95% of all bitcoin trades were faked in a variety of ways to inflate exchanges’ trading volume.
Since then, CoinMarketCap has taken a number of steps and introduced a number of products to tackle this. Among the most notable is its Top 200 Cryptoasset Rank requirements. These include having a market cap verified by the ratings firm and meeting a number of other requirements ranging from significant liquidity/trading activity to being audited by a “credible” third party.
Other metrics were added that look at liquidity measures, wallet balances, and traffic data. At the time of the Bitwise report, Chan explained, “for instance, if an exchange with low traffic has $300 million volume and just five BTC in its wallet, users will be able to draw their own conclusions without the need for us to make arbitrary judgment calls on what is ‘good’ or ‘bad.’”
In June, CoinMarketCap acquired Hashtag Capital, in order to help it do a better job of providing the true price of cryptocurrencies by using “algorithms and analyses” to move beyond its original volume-weighted price averages.
Ongoing market manipulation
“There is always more to do to keep our data of the highest quality,” Chan told Modern Consensus. “We are constantly working on improving our methodology, algorithms, data anomaly detection systems, new metrics and indices, and more. Other than the updated Liquidity Metric rolling out soon, we will be adding more qualitative measures of projects and exchanges this year, to provide even more context around the data we share on our site.
That said, she made clear in the announcement that CoinMarketCap intended to keep its list-anything ethos.
“Ever since our humble beginnings in 2013, we have been public about our commitment to remaining neutral by avoiding censorship and judgement of projects or exchanges that we list, preferring to let users make their own decisions based on the data,” Chan said. “We are delighted that the Binance team has been unequivocal in ensuring that we can continue to adhere to our methodology without prejudice.”
Bitwise, by contrast, proposed using just 10 “honest” exchanges when trying to convince the SEC the it could overcome the massive market manipulation that had prevented the agency from approving a bitcoin exchange traded fund, or ETF, in the past.
It was unsuccessful. As was every other attempt since then.
Updated April 2, 2020 at 9:04 p.m. to add Zhao’s comments about the value of CoinMarketCap’s users.