Many of the articles I have read about KuCoin Shares are the classic FOMO-inducing, the grass is always greener over here, here's my referral link kind of articles. Instead I'd like to share my approach to KuCoin Shares from an investment perspective, both the positives and negatives. Warning: this article contains basic math that may exercise your brain.
Discloser: I do not own KuCoin Shares and I am not recommending you buy, sell, or do anything related to them. This is not investment advice. Do your own research. Make your own decisions. This is strictly for educational purposes.
For those who don't know, KuCoin is a Hong Kong based exchange started in September of 2017. KuCoin Shares (KCS) are tokens issued by KuCoin much like Binance's BNB. These exchange-issued tokens provide some utility on the exchange. In the case of KCS, they provide a share of the fees taken by the exchange much like a stock would pay dividends to its shareholders. Essentially, KCS are a stock in the KuCoin exchange and the dividends are a portion of the fees the exchange takes.
For more detailed information, here is the full KuCoin whitepaper. For more discussion on the exchange, here is the KuCoin exchange subreddit.
In my opinion, crypto exchanges are competing in a massive land grab for volume. And how do you get volume? Users! Growth is the name of the game! To attract and keep new users on the exchange, KuCoin came up with KCS. Here is the infographic to explain KCS:
Essentially, 50% of fees go to KCS owners and 40% of fees go to users who successfully refer new users to the platform. The remaining 10% KuCoin keeps. Make sense?
As of 29/12/2017, the current 24hr trading volume of KuCoin is approximately $67,000,000 (source: coinmarketcap.com). KuCoin charges a 0.1% fee from each cryptocurrency being exchanged during a transaction. There are 100,000,000 KCS in circulation.
So what's the payout per KCS? Let's do the math!
Total fees collected = $67,000,000 * 0.2% = $134,000
Total shares payout = $134,000 * 50% = $67,000
Payout / # KCS = $67,000 / 100,000,000 = $0.00067
You're probably thinking - Wow that's terrible! Why am I wasting my time reading this?
Where KCS gets interesting is that this payout happens daily at 7:00pm EST. To get a real sense of the value of KCS, let's calculate the annual yield at today's current price of $3.14 per share (source 29/12/2017: KCS/BTC).
Annual payout / # KCS = $0.00067 * 365 = $0.24455
Annual yield = $0.24455 / $2.99 = 0.081789 = 8.18%
Hey that's not half bad! Something about supporting me. Use my referral link blah blah blah...
And this is where most articles about KuCoin and KCS end.
Instead, let's keep digging and find out why KCS might not be a great investment.
In no particular order, here are some concerns.
- Volatile Volume: one assumption we made in calculating the annual return rate of KCS is that the 24hr volume is representative of the annual daily volume average. As an example of why this is a concern, the 24hr daily volume of KuCoin dipped to approximately $35 million the day after writing the above (source: coinmarketcap.com). That's a 48% dip in volume and thus and 48% dip in payout. Essentially investing in KCS is a bet that KuCoin will maintain or grow in volume from the level bought in at. If anyone can find historical volume data on KuCoin please comment a link below.
- Exchange Minimums: the KCS bonus is paid in the actual coins the fees are collected from. This leads to the payout coming in tiny amounts in a bunch of different coins. Unfortunately these amounts are so small that they can't be liquidated until a minimum amount is accrued. For example, let's say an investor buys 100 KCS today at $3.65 per share. DeepBrain Chain (DBC) is the most popular coin trading by volume today at $13.3 million which accounts for 22% of 24hr volume. Such an investor should expect 0.048778 DBC in payout for the day. Unfortunately this amount is below the 1.0 DBC trading minimum so this investor would have to wait at least 21 days before accruing enough DBC to liquidate and realize this return. 21 days isn't too long but this is for DBC which accounts for 22% of volume. The time to accrue the minimum for less popular coins only grows from there.
- Changing KCS Bonus: The KCS bonus remains fixed at 50% for 6 months. This period will end in the beginning of March 2018 (see reddit comment from team). What will happen after this period? No one knows but this makes calculating an expected return after the locked period impossible. And such a critical unknown doesn't make an investor sleep easy at night.