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Cryptocurrency xchanges such as Binance are on track to achieving well over US$1-billion in profits this year. REUTERS/Dado Ruvic/Illustration/File Photo

DADO RUVIC/Reuters

A handful of cryptocurrency exchanges have suddenly become billion-dollar companies. An explosion in bitcoin’s popularity has supercharged previously small-time platforms into powerhouses generating millions of dollars in revenue every day.

The dizzying returns are a poke in the eye for stock and currency trading platforms that have opted to stay out of the world of digital assets. They must watch as barely four-year-old start-ups boast about bumper revenue. The question now is: how long can the bonanza last?

Previously unreported numbers indicate exchanges such as Binance and FTX are on track to achieving well over US$1-billion in profits this year, according to the companies as well as calculations by the Financial Times (FT).

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That was underlined on Aug. 10 when Coinbase, the largest listed digital asset exchange, surpassed market expectations by reporting that second-quarter net income climbed to US$1.6-billion from US$32-million in the same period last year.

“Growth has been phenomenal,” said Ben Zhou, chief executive of Singapore-based Bybit, on which US$76-billion of digital assets changed hands on May 19, the platform’s busiest day. “Volumes are 20 times higher today than in 2019.”

But the juicy profits come at a time when authorities in several jurisdictions are attempting to tighten their grip on what happens on these platforms. The rapid rate of growth will likely intensify regulatory scrutiny. And as competition between exchanges heats up, key players could seek out revenue away from trading in anticipation of downward pressure on the current hefty profit margins.

The biggest cryptocurrency venue by volume, Binance has generated US$1.8-billion of trading revenue since the start of the year, according to calculations by the FT. This figure is based on Binance’s average trading fees of 0.03 per cent on US$6-trillion worth of transactions, using data from CryptoCompare.

That puts the company on track to beat last year’s profits of between US$800-million and US$1-billion, according to Changpeng Zao. Known in the industry as CZ, the platform’s chief executive founded the company in 2017. He notes that the privately held company, which has no official headquarters, rarely calculates its earnings in U.S. dollar terms.

“[Profits are] held in various cryptocurrencies and thus [it] fluctuates on a daily basis,” he says.

Other big exchanges have also benefited from bitcoin’s rising popularity. Hong Kong-based FTX expects to make a profit of roughly US$400-million this year, says Sam Bankman-Fried, the company’s chief executive. That compares with profits of around US$77-million last year, based on total traded volumes and the 0.02 per cent average fee Mr. Bankman-Fried cites.

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“Two years ago, we were running a sort of miniature version of the current business,” he says. “It’s exactly the same as when we started the business but everything has two more zeros behind it.”

Average daily volumes on the largest cryptocurrency exchanges have grown exponentially in the past year to rival the number of transactions that take place in traditional currency markets. At the same time, key players in crypto trading are able to charge multiples of what their peers can outside digital asset markets: average fees range from 0.02 per cent to 0.05 per cent, compared with about 0.01 per cent outside digital assets.

The rate of extraordinary growth has translated into ballooning valuations. Mr. Bankman-Fried set up FTX in 2019 to create a reliable trading platform for his computer-driven cryptocurrency trading company Alameda Research. Last month, FTX was valued at US$18.7-billion as part of a funding round that raised US$900-million from investors. In February of last year, the exchange was worth US$1-billion.

But the rapid rate of growth could soon prove unsustainable due to a tail-off in the number of new bitcoin buyers, higher regulatory costs, and increased competition. Marcus Hughes, Britain and European head at Coinbase, says the company was looking for ways to expand its services and reduce its reliance on trading revenue.

The risks of regulation also loom large. FTX’s Mr. Bankman-Fried said it could “end badly” if industry participants did not engage with regulators while calling for more clarity about rules.

Bybit’s Mr. Zhou said crypto exchanges have benefited from a lack of rules in the past as regulators paid little attention to the digital asset space in previous years. That has changed in the past year.

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“Those who say they are not concerned about regulation are either lying or don’t understand what’s going on,” he says.

© The Financial Times Limited 2021. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied, or modified in any way.

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