Exchange tokens are a special breed of cryptocurrency. Just as with exchanges, their value is tied to market activity and only partially driven by overall market sentiment – even when investors are bearish on Bitcoin (BTC) and sell, exchange tokens can prosper.
In this piece, we’d like to think a bit more about how various exchange tokens have been designed, conduct some basic price analyses, and identify opportunities for innovation.
Very soon, at a date yet to be announced, AAX will be rolling out its own native exchange token, and while we cannot yet share the specific design elements and underlying mechanics, we would like to offer some of our perspectives on this subject.
The Cream of The Crop
At present, Binance Coin (BNB) is without a doubt the most popular exchange token. It makes sense. Binance caters to a large user base, generates top trade volumes, and has consistently driven innovation in the retail space.
BNB’s main utility is that it allows users to pay their trading fees at a discount. Additionally, apart from a few exceptions, BNB is the only way for investors to participate in Binance’s initial exchange offerings. Simple as this may seem, the fundamentals are clear, demand is high, and the coin is now the only exchange token in the top 10 cryptocurrency rankings, globally.
Despite its success, BNB is not unique. Along with Huobi Token (HT), KuCoin Shares (KCS), Bibox Token (BIX), BitMax Token (BTMX), COSS, BridgeCoin (BCO), and FTX Token (FTT), it shares many similarities in terms of utility, such as paying for fees at a discount.
HT is differentiated by its utility as it enables holders to vote on what new coins to list. Holders of KCS, BIX, COSS, and BCO receive platform dividends, whereas BTMX is used as a unit of exchange and for settlement. FTT, a relative newcomer, is used as collateral for futures trading, OTC rebates, socialized gains from the FTX insurance fund, and it furthermore benefits from weekly burns.
Exchange tokens versus Bitcoin
While there are many factors that play into a coin’s performance, such as date of launch, overall market sentiment, and the reputation and popularity of the issuing exchange, there is value in gaining insight into whether or not, and to what degree, there is correlation between the various exchange tokens and the price of Bitcoin. Here is what we found:
As we can see, correlation between BNB, HT and KCS with BTC has increased over time, with HT significantly standing out.
Interestingly, the correlation between BIX and BTC has decreased significantly. Judging from their performance over the course of 2019, both FTT and BIX seem to move on their own accord.
The question is, what’s preferred?
Aside from basic utility, it is technically possible to at least encourage correlation. For example, the issuer could drastically increase buybacks and coin burns whenever Bitcoin breaks out. On the other hand, the issuer could also program the coin in such a way that it stands a chance of becoming the go-to-asset whenever the price of Bitcoin plummets.
The point is, for the issuer, to be as conscious as possible in all of its design decisions from the outset, even though it is ultimately the market that decides the direction of a coin’s price.
The above graph shows BNB had an advantage over BTC since Binance launched its coin in 2017. But such an assessment does not do justice to Bitcoin. The graph does indeed include Bitcoin’s all-time high, but does not take into consideration its initial price back in 2009.
Furthermore, the real price of BNB overshadows and makes it difficult to assess the performance of other exchange tokens.
In the graph below, we have therefore taken a different approach. It covers the period from 2019 until the present and, instead of price, references ratio.
What we can clearly see from this graph is that BNB and HT – both of which strongly correlate with Bitcoin – have outperformed BTC since the start of 2019.
The next generation exchange token
In developing a native exchange token there are two main considerations: the needs of the issuer and those of the holder.
For the issuer, the exchange token ought to drive liquidity, trade volume, customer loyalty, and continued demand for the token. For the holder, whether this be an early investor or a trader on the platform, the exchange token ought to serve the simple purpose of maximizing profits.
Of course, the fulfilment of these goals cannot be guaranteed for either party, but these ‘two sides of the coin’ are top of mind as we continue to design AAX’s soon-to-be-launched exchange token, AAB.
AAX is the world’s first crypto exchange to be powered by LSEG Technology. Offering OTC, Spot, and Futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; a meeting point between crypto and global finance.