The Binance coin is interesting in more ways than one.
If you'd spent $10,000 on the Binance coin (BNB) two years ago, that BNB would be worth $103,190 today.
Two years ago (June 16, 2019), one BNB cryptocurrency cost $33.92. An investment of $10,000 would have bought you about 295 BNB. According to CoinMarketCap data, its value has increased by over 900%.
Of course, hindsight is a wonderful thing, and there are many matters we all wish we'd known about two years ago. But since we can't go back in time, let's look at BNB today and see if it's a good option moving forward.
What does BNB do?
The Binance coin is the native token on the Binance network. Binance is one of the largest cryptocurrency exchanges in the world.
BNB is more than a token on an exchange. That's because Binance is both an exchange and a platform for decentralized finance (DeFi) and other applications. DeFi applications are all the blockchain applications that seek to replace existing financial services. Developers can use the Binance Smart Chain (BSC) to build new projects.
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One reason this combination is particularly powerful is that DeFi projects built on the BSC can then reach potential investors through the exchange. For example, there's a Binance launchpad on the exchange that showcases new enterprises.
One small side note: Due to regulations around leveraged crypto trading, U.S. residents can only use Binance.US, which has fewer features and coins than the international site.
The Binance Smart Chain
The Binance Smart Chain is capable of running those all-important smart contracts.
Smart contracts, which have been key to Ethereum's success, are small pieces of self-executing code that live on the blockchain. At a very basic level, they can elevate a coin from being purely a token of exchange to being a token of exchange with added conditions.
Think of it as the difference between "I'll pay you 1 BNB" and "I'll pay you 1 BNB when you finish designing my company logo."
The Ethereum network has been increasingly congested this year, which has pushed up its gas fees (transaction fees). Gas fees increase when the network is busier. That has led many DeFi developers to look for alternatives. Binance is one of them.
Here are just some of the uses for BNB:
- Reduce and pay cryptocurrency trading costs on the Binance exchanges
- Participate in interest-earning activities, such as staking, on the Binance exchanges
- Pay gas fees on the BSC network
- Power DeFi and non-fungible token (NFT) projects
Potential challenges ahead for BNB
If you're considering buying BNB, it is certainly a solid cryptocurrency with a lot going for it.
However, there are also some challenges on the horizon to be aware of.
1. DeFi regulation
Increased (or overly strict) regulation is a worry for many cryptocurrency investors, but DeFi applications could be the worst hit. Various regulators want to weigh in, and the end result could be a much more restrictive environment for both Binance and the applications on its BSC.
Increased regulation could hit Binance's activities as an exchange and as a platform for other cryptocurrencies.
2. U.S. regulators' investigation into Binance
Binance is currently being investigated by the Justice Department and the IRS over allegations that U.S. customers have been using the international site illegally. The company is also under scrutiny in Germany and the U.K. after it issued tokens that track the prices of shares like Tesla and Apple.
It isn't so much the outcome of any of these cases that's worrying -- it's Binance's apparent willingness to keep pushing the regulatory boundaries. The risk is that at some point, it will come unstuck.
3. Other players in the market, including Ethereum 2.0
There's a lot of competition in both of Binance's markets. As a platform or ecosystem for other blockchain applications, the biggest player right now is still Ethereum.
Ethereum is in the process of a staged rollout of its Ethereum 2.0 (Eth2) upgrade. When it is fully working, Ethereum 2.0 would solve its scalability and sustainability issues, which may in turn make BSC less attractive. Cardano (ADA) and EOS (EOS) are also important players in this field, as both may offer an attractive environment for developers.
And there are hundreds of other cryptocurrency exchanges on the market, some of which are licensed to operate in the U.S. Binance has a loyal customer base, but it is still very early days.
All cryptocurrencies are volatile
As with any cryptocurrency investment, be aware that the market can be volatile and the market is relatively untested. As such, it isn't a great idea to invest money you can't afford to lose. Nobody can predict whether BNB will gain another 900% in two years. The real question is how you believe it will perform over the long term.
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Emma Newbery owns Bitcoin, Ethereum, EOS, and Binance coin.
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