Binance's huge acquisition of CMC may trigger a "trust crisis" in the cryptocurrency circle

Author: Carbon Chain Value

On April 2, 2020, the first day after April Fools' Day, Binance officially announced the acquisition of the cryptocurrency data website CoinMarketCap (hereinafter referred to as CMC).

Although many media outlets previously reported that the acquisition price was as high as $400 million, according to foreign media The Block, the actual amount of the acquisition transaction was less than $300 million (shrunk by more than a quarter), and it was not in cash, but in the form of equity and BNB tokens. In addition, the acquisition negotiations had reached a verbal agreement several months ago, and the final transaction was reached on March 31, 2020.

CoinMarketCap was founded in 2013 by "anonymous" founder Brandon Chez. The platform currently displays the prices, quantities, and other indicator data of approximately 5,290 cryptocurrencies and information on more than 500 crypto exchanges. It is one of the most popular websites for retail investors in the cryptocurrency industry. The industry has always regarded CoinMarketCap as the most trustworthy and fair cryptocurrency price data website.

Why did Binance acquire CoinMarketCap?

The first reason why Binance is eager to buy CoinMarketCap may be traffic. It is undeniable that compared with other cryptocurrency and exchange ranking websites, CoinMarketCap has indeed attracted more attention. In the cryptocurrency industry, if you want to search for a cryptocurrency, you usually don’t start with traditional search engines such as Baidu and Google, but go to professional data platforms like CoinMarketCap to search. According to SimilarWeb data, CoinMarketCap is the undisputed cryptocurrency data center, attracting a total of 207.2 million visitors in the past six months, 80% higher than Binance.

According to data from Alexa, a global website ranking site, CoinMarketCap is currently ranked 570th in global visitors, while Binance is ranked 2045th and Coinbase is ranked 1828th. From these data, it can be seen that CoinMarketCap has surpassed the vast majority of crypto industry websites in terms of the number of visitor users. This means that although CoinMarketCap's revenue-generating mechanism is not as good as that of exchanges, it is a very valuable platform that can attract a large amount of traffic, which is one of the main reasons for CoinMarketCap's acquisition.

The second reason for CoinMarketCap's acquisition may be due to itself. Previously, the Blockchain Transparency Institute pointed out that 17 of the top 25 cryptocurrency exchanges on CoinMarketCap had fake trading problems, and the fake trading volume accounted for as high as 99%. This report immediately caused a great shock in the industry. CoinMarketCap quickly made remedial measures and formed a data accountability and transparency alliance to ensure the authenticity of the data.

However, this incident has dealt a heavy blow to CoinMarketCap. People have questioned the fairness and data authenticity of CoinMarketCap, and its reputation has also been greatly affected. In addition, CoinMarketCap's business model is relatively simple. Although its current global website ranking is more than 500, it should be noted that less than two years ago, its ranking has remained in the top 200. The decline in performance has become a problem that CoinMarketCap must face. Therefore, when it is impossible to innovate its business model in a short period of time and an excellent acquisition opportunity appears, CoinMarketCap is naturally unwilling to give up.

The third reason is that Binance currently handles billions of dollars in liquidity every day, and also runs Binance Chain, Binance Cloud, decentralized exchange Binance DEX, IEO platform Binance Launchpad, as well as various products such as Binance Research, Binance Academy and Binance X. The market value of its native cryptocurrency BNB has ranked among the top ten in the world's cryptocurrency market value (ranked ninth according to CoinMarketCap data at the time of writing this article).

However, BNB currently does not seem to have any other particularly valuable practical use cases except within the closed loop of the Binance ecosystem. Therefore, Binance may be eager to find an "exit" for BNB, and CoinMarketCap's traffic seems particularly suitable for solving this problem. However, Binance's post-acquisition layout may not only look at the immediate benefits, but more at the long term. If Binance rushes to transfer CoinMarketCap's traffic to the Binance ecosystem, it is likely to disturb the original customers, so they should not take such measures in the short term.

But overall, CMC will still maintain a certain degree of independence. Moreover, as Binance publicly disclosed, CoinMarketCap will continue to operate as an independent entity. Although Binance trading platform information and BNB have been included in CoinMarketCap, Binance and CoinMarketCap are two companies that maintain strict independence, that is, Binance will not interfere with CoinMarketCap's ranking business, and CoinMarketCap will not have any impact on Binance's existing business.

What subsequent impact will Binance’s acquisition of CMC have on the entire cryptocurrency industry?

In the crypto industry, Binance is often seen as the most typical centralized exchange, and its recent series of acquisitions seem to confirm this. Considering that Bitcoin and cryptocurrencies are decentralized assets, this seems somewhat ironic. Below, we will analyze what red flags Binance's acquisition of CoinMarketCap will release:

1. Cause fairness concerns and trust crisis

One of the most important reasons why CoinMarketCap has been able to gain a foothold in the crypto industry is that it has won the trust of many people. Many cryptocurrency investors, traders, and project parties will make price-related decisions (such as buying or selling) based on CoinMarketCap's data. In this regard, Binance does not seem to have a good history. According to a report released by BTI in April 2019, Binance has a serious problem of wash trading, of which the wash trading volume of 30 trading pairs accounts for 25-75% of its total trading volume. (Report address: https://www.bti.live/reports-april2019/) Not only that, Binance has repeatedly encountered other problems such as server crashes, thefts, and information leaks, some of which have even caused huge shocks in the industry, such as:

1. On May 8, 2019, the Binance Bitcoin hot wallet (wallet address: 1NDyJtNTjmwk5xPNhjgAMu4HDHigtobu1s) was stolen, and about 7,000 BTC (worth about $40 million at the time) was stolen by hackers. After the incident broke out, the price of Bitcoin once fell rapidly, from $6,638 to $6,447 in just one hour.

2. On August 7, 2019, the KYC information of Binance users was suspected to be leaked. At that time, someone posted a large number of KYC information and photos of suspected Binance users in a Telegram live broadcast, including users from more than a dozen countries including China, Japan, Vietnam, and Pakistan.

3. Between February 10 and March 4, 2020, Binance experienced three system failures, including data module problems, message service problems, and potential DDoS attacks.

In fact, after 7,000 BTC was stolen from Binance, Zhao Changpeng said on Twitter that he would consider how to roll back on the Bitcoin network. After the release of this news, it immediately triggered criticism from the cryptocurrency community, and he had to publicly announce that he had given up the idea (screenshot below), but some netizens still pointed out that it was a terrible thing for a cryptocurrency exchange CEO to have such an idea.

Not only that, Zhao Changpeng's personal grudge with Craig Wright, also caused a "fairness crisis". Although many people in the cryptocurrency industry do not like Craig Wright, Zhao Changpeng decided to remove BSV (a Bitcoin hard fork cryptocurrency supported by Craig Wright) from the Binance exchange just because of the conflict between the two. This move made the cryptocurrency industry feel incredible because people found that Binance could add/delete digital assets according to personal preferences.

2. Binance wants to establish a monopoly and destroy competitors?

After Binance announced its acquisition of CoinMarketCap, its competitors were filled with mixed emotions, so the impact of this acquisition on the entire crypto industry has actually far exceeded the transaction itself.

Lennix Lai, head of financial markets at OKEx, said that he was pleased to see large M&A transactions amid the bullish cryptocurrency market. Although there was some skepticism, it was beneficial for the industry for large crypto market participants (such as Binance) to reinvest in key crypto infrastructure. He said:

“It’s understandable that people might be skeptical about whether CoinMarketCap will remain independent after being acquired, but I think CoinMarketCap should be given a chance.”

In contrast, Andy Cheung, founder of cryptocurrency derivatives trading platform ACDX, believes that the acquisition is “not very good” for the entire cryptocurrency industry. Taking Binance’s native token BNB as an example, he said:

“I think there is business and potential interest, but to be honest, when you (Binance) run your own exchange and are the largest holder of BNB tokens, it’s hard to convince people of the trading volume and ranking.”

Andy Cheung even believes that this acquisition will deal a blow to the "personality cult" of Zhao Changpeng in the crypto industry, adding:

“Changpeng Zhao has been telling everyone that Binance did not acquire CoinMarketCap for money, but to build something more meaningful for humanity. I was disappointed to hear him say this, and I hope I am wrong, he should have a better reason.”

Since September 2019, Binance has acquired at least 9 companies, but only a few of them have been made public, and CoinMarketCap is the largest of Binance's recent acquisitions. Now, the crypto community has begun to worry about Binance's monopolistic expansion, because Binance is taking traditional acquisitions to seize the market instead of focusing on providing better decentralized crypto products.

There are often links to specific exchanges on CoinMarketCap. Some smaller projects don’t actually have much liquidity, but ranking websites are windows to attract investors, so they can often embed affiliate links from their websites to certain exchanges. Some ranking websites even allow users to trade crypto tokens directly on their platforms. As the leading data provider in the crypto industry, the combination of CoinMarketCap and Binance will undoubtedly intensify the industry monopoly. People are worried that when they encounter questions such as "where to buy a specific cryptocurrency" in the future, CoinMarketCap will directly point to Binance.

Some market analysts believe that "Binance may ask CMC to adopt a calculation method that is more conducive to Binance listing altcoins. For example, using a more exaggerated calculation method for trading volume and depth. If this is done too much, it will weaken everyone's trust in it. Although no one can challenge CMC's position in the short term, in the long run, someone will challenge it."

"If other exchanges continue to support CMC, it would be tantamount to supporting their own competitors. So in theory, other exchanges should have the motivation to support a competitor of CMC," said the above person.

Will investors and traders still rely on CoinMarketCap?

At present, CoinMarketCap is indeed in a leading position in cryptocurrency price tracking, but given the decentralized nature of the cryptocurrency industry, it is necessary to break the over-reliance on a single platform while ensuring reliability and accuracy.

In addition, over-reliance on a single data source can also lead to market risks. Once a problem occurs, it is more likely to cause market panic and other problems, which will then expose investors to huge chaos in the buying and selling markets. Therefore, we need to be wise enough to choose some alternatives, such as: Coingecko, WorldCoinIndex, CryptoCompare, Messari, COIN360 and CoinCheckup.

Conclusion

Just after CoinMarketCap was acquired, CoinMarketCap's "anonymous" founder Brandon Chez chose to leave and announced that he wanted to focus on his family during the COVID-19 pandemic. In response, Zhao Changpeng said something meaningful:

"We would have loved to keep him, but he wanted to take a break, and given the size of the deal, it made sense."

Perhaps only the person involved can understand the feeling.

Author: Fifty Shades of Grey, Carbon 18

Editor: Qin Jin

Produced by: Carbon Chain Value