Author: Biupa-TZC

As the market gradually cools down, Binance announced today that MGX has invested in Binance. Combining the objective fact that Binance sold a large amount of crypto assets in January, I will analyze the possible investment logic of MGX, the motivation behind Binance's reduction, and the market impact, hoping to provide a logical explanation for a series of events.

I. Valuation of Minority Stake Investment

During my time working at a foreign investment bank, I participated in a minority stake investment deal. In that transaction, the buyer was a European pension asset management institution, and the seller was a Chinese company, while our bank acted as the buy-side advisor. In such investment transactions, the buyer needs to determine the valuation of the target company, so they usually build complex valuation models.

We used an Excel model containing dozens of worksheets to conduct valuation calculations, ensuring that the transaction price was reasonable.
Since the buyer wants to buy at a low price and the seller wants to sell at a high price, both parties typically need to go through multiple rounds of negotiations to reach an agreed transaction price.
From an investment logic perspective, the process of MGX investing in a minority stake in Binance is likely similar. In the transaction, MGX needs to model the valuation of Binance and negotiate with Binance on valuation and investment terms.

The transaction price/valuation will be the core issue of the entire deal. If the buyer can lower the price, they can increase their investment return (IRR/MOIC); if the seller can raise the price, they can increase their own returns, leading to a conflict of interest. This is also what I believe to be the reason behind Binance's sell-off in January.

II. Background and Investment Method of MGX

MGX is an investment platform jointly established by the Abu Dhabi sovereign wealth fund Mubadala and technology group G42, possessing attributes of a semi-sovereign fund. Mubadala is known for its high salaries, with many staff coming from European/Hong Kong/U.S. investment banks, as well as some transitioning from private equity funds (Mega Funds), resulting in a highly professional team.

According to the conventional process of private equity investment (PE), MGX would also conduct detailed valuations before investing in Binance.

The final transaction price was not disclosed to the public; only the investment banks, lawyers, auditors, and other professional institutions involved in the transaction could see the specific data. Common calculation methods may include P/E, EV/EBITDA, EV/AUM, etc. Here, one can refer to how U.S. sell-side analysts value Coinbase, as the logic is quite similar.

III. Composition of Binance's Assets and Reduction Amount

In the valuation of traditional enterprises, assets mainly refer to fixed assets, which are evaluated by professional institutions (such as JLL, Cushman & Wakefield). As the world's largest cryptocurrency exchange, Binance's asset side includes not only fixed assets but also a large amount of cryptocurrency holdings.

According to Binance's publicly disclosed Proof of Reserves, its own assets can be calculated by subtracting "customer net balance" from "Binance wallet balance." As of January 1, 2025, Binance held approximately 50,000 BTC, 3 billion USDT, 220,000 ETH, 6 million BNB, 450,000 SOL, 70 million FDUSD, 100 million XRP, and 700 million USDC.

As of February 1, Binance held approximately 2,700 BTC, 270 million USDT, 150 ETH, 5 million BNB, 4,000 SOL, 30 million FDUSD, 90 million XRP, and 1.3 billion USDC.

From the data, it can be seen that Binance significantly reduced its holdings in January:
50,000 BTC (approximately $5 billion)
220,000 ETH (approximately $700 million)
1 million BNB (approximately $600 million)
450,000 SOL (approximately $100 million)

USDT decreased by $2.7 billion, while USDC increased by $1.3 billion, resulting in a total net reduction of $1.4 billion in stablecoins.

In total, approximately $8 billion of cryptocurrency assets were reduced.

IV. Possible Reasons for Binance's Large-Scale Reduction

Binance reduced approximately $8 billion of cryptocurrency assets in January, accounting for a large portion of its held assets. I believe there are three main possible reasons:

Facilitating Valuation Confirmation and Reducing Price Volatility Impact

Cryptocurrency prices are highly volatile, with daily fluctuations reaching 5%-10%, and liquidity discount issues are evident. Clearing crypto assets before the transaction helps reduce valuation uncertainty, making it easier for both parties to reach a consensus.

Aligning with MGX's Investment Preferences

As a semi-sovereign fund, MGX's investments may not only pursue financial returns but also relate to the Abu Dhabi government's investment attraction/national strategy. Therefore, MGX is more likely to focus on Binance's core trading business and may have little interest in buying its held crypto assets. Binance may have proactively divested crypto assets before the transaction to align with MGX's investment preferences.

Dividends for Existing Shareholders

Binance may have used part of the funds from reducing crypto assets for dividends to existing shareholders, allowing them to receive cash before the transaction. Meanwhile, MGX could invest in Binance's core business at a lower price, achieving a win-win situation.

V. Market Impact Analysis

Binance's reduction had a certain impact on the crypto market in January.

BTC: The total net inflow of ETFs in January was $5.25 billion, and the value of BTC reduced by Binance was $5 billion, effectively offsetting each other.

ETH: The total net outflow of ETFs in January was $660 million, while Binance reduced $700 million, effectively doubling the ETF outflow.

If Binance had not conducted this round of reductions, the closing prices for BTC and ETH in January might have been higher than $102,500 and $3,300, respectively. BTC could have potentially reached an all-time high above $109,000 in January; however, since most altcoins (including ETH) had already seen declines in mid to late December, it remains uncertain whether the market could have overall reached new highs in January even without Binance's selling pressure.

My estimate is that without Binance's selling pressure, ETH in January would likely have closed in the green (above $3,300), but the closing price might have been lower than the December opening price of $3,700. Correspondingly, altcoins might have seen a slight increase compared to December 31 but would still be below the December 7 high.

The decline in February mainly stemmed from the uncertainties brought by tariffs/recession under the Trump administration, which is largely unrelated to Binance's selling pressure.

VI. Future Outlook

After MGX's investment, I believe the overall impact on the crypto market is neutral or positive. MGX's use of stablecoins to invest in Binance means that Binance's asset side has added stablecoins, which may be used for market making/lending/rebuying cryptocurrencies, thereby enhancing liquidity in the crypto space. If MGX no longer requires Binance to hold cryptocurrencies and operates purely as an exchange, since there are almost no cryptocurrencies left in Binance's existing assets, this will not have a negative impact on the future market.
If Binance's sell-off was merely for valuation convenience and shareholder dividend needs, and if they still plan to re-enter the cryptocurrency market, as the market gradually declines/reaches a bottom in March, there may be potential buying power to re-enter, which could form a potential positive for the market's bottoming and rebound.
As a private company, Binance indeed has no obligation to inform us in advance about its selling operations in January. Retail investors in this market face information asymmetry, and this is not the only instance.

Given that the events have already occurred and the negative news has been fully released, the overall outlook remains optimistic. With the decline in U.S. stocks, we may have a good opportunity to buy at the bottom. In the second half, if Binance's stablecoins are put to use, there may be even more excitement in the second round of the bull market.

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