Industry titan Jack Welch is justifiably held up as one the finest CEOs of all time. As chairman and leader of General Electric for 20 years between 1981 and 2001, he amassed a net worth of nearly a billion dollars. One of his most-quoted lines about how to grow a company is this: “Number one: cash is king. Number two: communicate. And number three: Go out and buy or bury your competition. Steal their employees. Steal their R&D. Steal their salespeople. Bury them.”
Binance appears to be following this mantra
Binance is already the largest crypto exchange by volume on the planet, three times larger than nearest rival BitMex, according to Nomics. It is also understood to be the most-visited exchange in the world, with 21.7% of the traffic share. In second place is San Francisco’s Coinbase with 20.3%.
In his 2020 New Year’s message to the Binance community, CEO CZ Zhao offered an insight into his acquisition strategy.
He wrote: “As the saying goes when you can’t beat them, buy them. And this is definitely true for all of our acquisitions. When we identify top talent with a top product that we can’t beat, and the teams share common values, a merger makes sense in most cases. Binance made no less than nine full acquisitions in 2019, with only a small number of them being publicly announced so far.”
Among Zhao’s 2019 takeover deals were Indian exchange WazirX, crypto futures broker JEX, data analytics tracker DappReview. “There are always a number of deals being discussed at any given time, and there are two that I am very excited about specifically,” Zhao added.
One of the two most recently confirmed deals in the crypto market the $400m cash and shares deal for CoinMarketCap (CMC) in March 2020. Buying the industry-standard data aggregator gives Binance an immense advantage that it could not have produced by itself.
According to website data provider SimilarWeb, quoted in TheBlockCrypto, CMC’s traffic is 80% higher than Binance. CMC drew 207.2m visitors in the last six months, compared to 113.8m for Binance. And this ability to drive a significant amount of traffic is one of the main reasons for the acquisition, sources told TheBlockCrypto.
And habits are hard to break. CoinMarketCap will still attract hundreds of millions of visits every year, even while people are armed with the knowledge that the industry’s largest company controls it.
Mergers and Acquisitions
In order to generate more business, Binance needs more eyeballs on its products. So, when the organic growth that it can generate under its own steam starts to slow, Binance needs to acquire companies that already do what it can not.
Binance has amassed a war chest of billions of dollars from its everyday activities which allow it the ability to swallow up its rivals. Mergers and acquisitions of this kind are extremely common in the mainstream business world.
Companies need to keep growing to maintain or improve their market share. So they acquire smaller firms and merge their services under one umbrella.
It really began way back in July 2018 with the first Binance acquisition, when Zhao moved to take over mobile wallet company TrustWallet. He told TechCrunch at the time: “For users who like to withdraw funds into a wallet now we have a product they can use. We are like the addition of a godfather to a baby. They are strong technically but haven’t done much marketing which is where we can help. Now merging with us they don’t have to worry about money.”
Other crypto giants are making the move to consolidate their power base and offer more services for their users. Tron is the most notable example. Under the banner of the Tron Foundation, CEO Justin Sun acquired the world’s largest decentralized P2P data distributor Bittorrent for $140m, completing the deal in July 2019.
BitTorrent claims a user base of $100 million per month and says its protocols move as much as 40% of the world’s internet traffic every day. After that came the Poloniex exchange, originally spun out from Circle, in November 2019. Then blockchain streaming platform DLive in December 2019, and most recently content sharing platform Steemit in February 2020.
These kinds of moves will become increasingly common as large crypto and blockchain companies shift their growth focus from organic to acquisitive.
Blurring the boundaries
The strategy is not without its pitfalls.
The crypto world still suffers from a lack of cross-border regulation and the kind of investor protections that exist in equity markets, for example. And the opaque structure of some of the industry’s biggest players has come under intense scrutiny in recent years.
The CMC buyout makes a pretty compelling business case for Binance. But the optics of the situation do not look good. We are, after all, talking about an intensely rich private company that made a huge fanfare about moving its headquarters to the Mediterranean ‘Blockchain Island’ of Malta in February 2019.
12 months later, it emerged that Binance was not authorized to operate in the EU country, according to its financial regulator.
Now that this financial juggernaut of a company controls the industry-standard aggregator, it blurs the line between independent and privately-controlled data provision.
As Ankit Bhatia, CEO of Sapien Network, wrote: “It looks like Binance is building a crypto empire. I’ve always seen CoinMarketCap as a fair, unbiased platform not controlled by any particular projects in the space. It’s fairly detrimental to have it controlled by an exchange that doesn’t hesitate to skirt around regulations or push its own agenda.”
Industry commentator Gary McFarlane, who covers cryptocurrency for British financial services giant interactive investor, added: “Binance appears to be on a mission to be the one exchange that rules them all. The danger for both parties is that their marriage erodes trust in both entities. But this is certainly a vote of confidence in the veracity of CMC’s data and its ad revenue stream. That could be risky.”
This appears to be a risk Binance is willing to take in order to solidify its power base and extend the boundaries of its empire.
One final point. Blockchain is built upon the idea of network effects. This is the phenomenon whereby a service gains more value the more people that use it. Adding more services on top of a simple cryptocurrency exchange can help to scale business not just linearly, but exponentially. I would expect in the next five years we will see the same thing happen to the crypto space as has happened in traditional business. Multinational giants. Fewer players, with more power.
Maxim Bederov is a serial entrepreneur, venture capitalist, and fintech technology expert. He has nearly two decades of experience in financial services and has been active in fintech technology and the digital asset space since 2014.