Binance (BNB-USD) has been operating in a highly volatile and risky market since its inception. Yet, many traders were drawn to the cryptocurrency market, giving it huge upside potential.
In the past two years, Binance has had to endure several disruptions in its performance. The market meltdown in 2022 shook most crypto exchange platforms as multiple shocks led to the unexpected fallout of FTX (FTT-USD).
Recently, it faced another controversy after its former CEO Zhao admitted guilt of violating the US Anti-Money Laundering Act. It caused inhibitions among traders for some time, putting downward pressure on its value.
But amid all these, BNB continues to emerge strong, showing sustained rebounds after the temporary dips. Thanks to its prudence and increasing predictability, it helped increase traders’ confidence. With its stability, we don’t think BNB will be another FTX in the making.
This giant still dominates the market while capitalizing on the shortcomings of its smaller peers. It maintains a solid competitive advantage, sustaining its market coverage and appreciation. It must watch out for recent inflationary changes affecting its price direction. Hence, we must assess the opportunities that bring upside potential to it.
BNB Price Increase Drivers
Many traders have thought and still believe that cryptocurrencies can become a good inflation hedge. For a long time, price changes were driven mainly by market sentiments. Also, the price swings were unquantifiable in contrast to stocks. But its direction appeared to have become more understandable in over two years. Its inverse pattern with inflation has been notable, with contradicting views of it tempering its value amid macroeconomic volatility.
In the chart below, we can see how Binance moved in line with inflation.
To prove their inverse relationship, we can use correlation by looking for Multiple R, which is the correlation efficient. Its 72.9% Multiple R shows a strong inverse correlation between inflation and BNB price.
Today, inflation is reported at 3.4%, a 0.3% increase from the previous month but a 60% decrease from its 2022 peak. The slight inflation increase is attributed to the holiday spending splurge in December. But as consumption normalizes again, we can expect it to slow down in the following months and hit the Fed’s target range. With that, BNB price may sustain the increase.
Cryptocurrencies are notorious for their volatility, making them risky investments. Yet, volatility can be a double-edged sword that lets many traders derive massive gains from sharp price increases. Binance shows a similar trend, given its notable crests and troughs. What’s important is its trend over the years. It has been generally moving in an uptrend, making BNB trading viable.
If we compare it to stock price indices, BNB has outperformed them.
|S&P 500 (SPX)
|NASDAQ Composite (IXIC)
|Average Annual Returns
BNB returns are far higher than the primary stock indices in the US. It was about seven times their average annual returns. The downside is the considerable volatility of BNB, which was about ten times larger than the SPX. But if we weigh the risks and returns using the Sharpe Ratio, BNB is the optimal choice.
We also applied the Treynor Ratio and Jensen’s Alpha to confirm this further. We used the average of the primary cryptocurrencies as the reference for BNB, SPX, and IXIC. BNB and SPX have betas of 0.84 and 0.72, respectively. Their slope or direction is similar to the movement of the primary cryptocurrencies. They are in contrast to IXIC, with only 0.04 beta. From there, we derived the Jensen’s Alpha of the three investments.
|S&P 500 (SPX)
|NASDAQ Composite (IXIC)
|Average Annual Returns
|Return on Market
Jensen’s Alpha of 1.33 shows that Binance outperformed the crypto market average. This number is much higher than SPX and IXIC, with 0.43 and 0.14, respectively.
Solid financial positioning
At the end of 2022, Binance’s total digital assets amounted to $52-54B. It bled about $15B-20B in assets after its transparency report. The majority of the lost portion was due to its foregone assets. Other estimates were at $48B-50B.
It was still high amid the disruptions the crypto exchange market faced. Also, its market capitalization was $44B, while margins ranged from 12%-20%. Indeed, it showed resilience amid the FTX fallout, allowing it to take its position and become the new largest crypto exchange platform.
In 2023, it went into a lull as macroeconomic indicators became more manageable—these pacified investor woes, leading to a slight price rebound.
In November 2023, it faced a new challenge as it agreed to settle fines of over $4B with the DOJ, causing a notable price drop. Even so, its recovery came earlier than expected as the price regained momentum after analysts warned about buying BNB during price dips to avoid a bull trap. But expectations were immediately discarded, given the sustained price rebound. This may have been driven by investor confidence about its liquidity.
Given all these, traders must note that Binance has $79.72B in digital assets. In addition, it has $46.66 in market capitalization, showing adequate coin inflows to support price increases. These prove that Binance has enough assets to settle its fine with the DOJ in the wink of an eye.
But what makes Binance secure and stable is its prudent allocation of tokens. The same report by Nansen shows that Bitcoin (BTC) remains its top token, comprising 30.22% of the total reserves. It also has 526,960 in Bitcoin balance, the largest among all crypto exchange platforms.
With that, it may attract more BTC traders. Note that BTC has been working closely with many business establishments. These are now accepted as payments.
More interestingly, employees use BTC to build retirement funds. It’s no surprise that trading platforms like Bitcoin IRA are entering the market to address the evolving traders’ needs.
Lastly, its own token reserves are only 4.04% of the total. This is in contrast to FTX, which used to rely on its own tokens heavily. Hence, BNB is very far from becoming another FTX in the making.
Recovery from DOJ’s fine
In November 2023, its decision to plead guilty to the DOJ caused many investors to doubt its reliability and liquidity momentarily. This hurt its performance as the price fell by 8.3% a few hours after BNB reported its admission of guilt.
The price cut halted the two-month streak of its price uptrend. It hit $210-230 from the previous $230-250 range. As such, it created a new support level.
Amid the chaos, the rest of the BNB traders saw an opportunity to find a cheaper entry point to buy Binance. This proved effective as the two-week downtrend increased demand for its tokens. Also, its statement of assets confirmed its sustainability. These notable changes put upward pressure on its price in a short period. BNB demonstrated its resilience as the price rebounded and exceeded its resistance level.
Binance has experienced a series of disruptions in the past two years. But that did not stop it from regaining momentum and keeping its solid market positioning. With the current macroeconomic indicators and its financial positioning, the Binance uptrend may be sustained. Hence, it appears to be a solid investment.