The Winners in the Crypto Bear Market
This year has not been easy for cryptocurrency investors. After coming off a high of almost US $20,000, the price of Bitcoin has since plunged by more than 60% — taking down other tokens with it. Regulators worldwide are also clamping down on initial coin offerings. ICOs spawned hundreds of alternative cryptocurrencies (altcoins) last year, driving up volume in cryptocurrency exchanges.
But some tokens have proven resilient to the bear market. Cryptocurrencies issued by exchanges, such as Binance and Huobi, have powered through the ups and downs of Bitcoin, with the exception of the free fall of prices at the start of the year. Since February, the price of both Binance Coin and Huobi Token has seen steady growth; the former by 75%, the latter by more than 250%.
“In the bear market, the exchange tokens are all winning,” says Jake Lim, head of global business development at Overnodes, a blockchain payment service based in South Korea. The main reason is that "they actually have utility for people.” Both Binance and Huobi customers, for instance, can use the exchanges' eponymous tokens for discounts on trading fees. That's a tangible benefit for token holders.
It helps that exchanges have become crucial gatekeepers in today's world of initial coin offerings, where blockchain companies raise funds by issuing their own cryptocurrency in a crowdsale. In many cases, token price appreciation depends heavily on its ability to get listed on a major exchange -- so much so that listing fees on an exchange can be as high as $3 million.
This presents an opportunity for exchange tokens. Binance, for instance, lets Binance Coin holders vote on "community coins" or tokens that get listed on the exchange for free once a month. The fact that Binance is the largest exchange in the world by volume -- Lim calls it the "holy grail for the coin market" -- makes this offering incredibly appealing. One thing to note, however, is that exchange tokens are often only available on their own platforms, which makes it easier to control or even manipulate their price.
In the future, the functionality of exchange tokens is expected to increase as companies like Huobi and Binance expand their businesses. This too will make exchange tokens less dependent on the price performance of Bitcoin. Many have launched their own incubators, billion dollar investment funds, and decentralized exchanges, such as Huobi’s HADAX.
Decentralized exchanges, where users trade directly with each other using their own personal wallets (as opposed to using the exchange as an escrow), could be another use case for exchange tokens, as they’re a way to collect trading fees on the decentralized network. That being said, trading volume on decentralized exchanges is still magnitudes lower than that of traditional cryptocurrency exchanges.
Of course, when the market's down, even the best performing tokens take a hit. On Sunday, the cryptocurrency market took a sharp and sudden downturn, throwing the price of Bitcoin below US$6,000 for the first time since last October. Other tokens suffered even greater losses -- EOS, a blockchain project sometimes compared to Ethereum, saw its cryptocurrency drop 13 percent within 24 hours. For seasoned investors, however, it’s just another bump in the road.