Follow the Volume
Updated: Apr 6, 2019
Using exchange fundamentals and public valuations, we explore a relatively unknown exchange (Liquid by Quoine), determine it is likely a unicorn, and explain why the market hasn't realized it.
Edit: Corrected Typo on April 6th, 2019
As always, we want to caveat that the opinions expressed in this article are those of the author(s), and are not financial advice. Please take personal responsibility for yourself and your actions.
Comparing exchange volume against recent public valuations.
We want to be clear - we are not doing a cash flow analysis, market projection, and / or other modeling. In this article, we are simply using the most recent market valuations for this industry, and applying them to exchanges without public valuations by comparing their underlying fundamentals (volume and liquidity).
Our sample set uses the October 2018 Series E valuation of Coinbase, as well as the February 2018 Poloniex acquisition by Circle. Comparing these valuations against the industry basis of competition - Liquidity and Volume - we believe Quoine (the company behind Liquid), may be the world's least recognized 'unicorn' (a company valued at $1B).
Don't lose sight, liquidity and volume are king.
Before we dive into the analysis, we want to step back for a moment and address some potential concerns you may have with this simplistic valuation. You may be saying that this comparable valuation won't work because (1) brand equity differences, (2) differences in local markets, and / or (3) differences in services offered (such as custody solutions, etc.). We will address these points below, and explain why we feel comfortable with this comparative set:
Brand Equity: Brand power should lead to increased market share. Only Liquid and Binance are currently gaining share. This will eventually translate into volume.
Local Market Differences: Long-term, this may play a role due to regulatory divergence and or consumer differences. For now, we see this as minimal.
Platform Product Differences: Other products (Custody, margin, lending, etc.) are hard to quantify. We do not believe these represent material business at this time (though admittedly may in the future).
If you disagree with our positions on the above, please use those differences to inform our interpretation of the below analysis.
Based on volume alone, Quoine is likely worth $1B.
Don't miss the forest for the trees. Some simple and salient points:
At ~33% lower volume, Coinbase was recently valued at $8 BILLION
Poloniex, when purchased for ~$400M, had ~50% of Liquid's current daily volume
Along with Binance, Liquid is the only other exchange gaining market share
Using just volume-based comparables, we estimate that if Liquid raised equity today, it would fetch a valuation between $800M and $6B. Yes, we recognize this is a wide range, but even the minimum bound is within striking distance of $1B.
A few explanations on why this hasn't been recognized.
To be fair, Quoine has not fully escaped its deserved recognition. It held a highly oversubscribed Initial Coin Offering (which included notable investors) and has been recognized by KPMG as a leading FinTech innovator. However, we think there are two reasons that Quoine has escaped the limelight.
Quoine has raised very little equity: Without ongoing equity infusions, there are no headline-grabbing company valuations (such as Coinbase's ongoing cash infusions).
Quoine has run a fee-less exchange: In sharp counter to Coinbase's high trading fees, Quoine has kept the vast majority of fees on its Liquid platform turned off. Fees will be activated on March 20th, but even then will be a very reasonable 5 bps per trade. This should start providing revenue numbers to use for valuation benchmarks.
We will continue to follow this company (and their utility token Qash / LQC) closely. We expect to see converging valuations longer-term, with either a Coinbase devaluation or a proper Quoine valuation.
Questions or Comments? Reach out at BearMarketValuations@gmail.com
THIS REPORT IS NOT FINANCIAL ADVICE. AUTHORS MAY OWN POSITIONS IN UNDERLYING ASSETS DISCUSSED. PLEASE DO YOUR OWN RESEARCH.