Introduction
In this post, I will be looking at how much Annual Percentage Yield (APY) you can achieve with $1,000 on Binance. Basically how much would you make in a year?
But that is not the main goal of the article, we will be using this number to look at the implied risk of keeping funds on Binance. To do this I will look at APY that can be achieved and then subtract all the known risks, what’s left should be the market's estimate of the risk of keeping funds on Binance.
Now we will be using USD in this example as it is the most used on Binance and in Crypto in general, but everything here could be done in any currency just by first exchanging most of your funds for USD and then using the rest to hedge the exchange rate to your preferred currency.
The following method I am going to describe may not be the best but it is the one I have used so if you know of any better and are willing to share I’d love to hear about them. Anyway, here’s what can be done.
The trade
First, take your $1,000 and change it into USDT you should then have 1000 USDT (for those saying ah that’s not risk-free, yes, yes I know but we are going to deal with the risks later) then buy 1000 USDT of ETH, going forward I will assume ETH is priced at 1,800 USDT. You should now have 0.555 ETH. We are going to split this about 80:20 so 0.444 and 0.111
We then use the 0.111 ETH as collateral to sell 0.555 ETH on the futures market. At this point you are hedged and even if the price of ETH changes you should have $1,000 in value. If ETH goes up too much your hedge could be closed due to lack of collateral but this could be avoided by a bit of buying and selling. At this point you are already making a yield from the funding fee on the futures, the average yield for the last 90 days was 6.43% APY on the 0.555 ETH, which is about 64 USDT, as the ETH price fluctuates this will change slightly but will remain about 64 USDT if you adjust the hedge accordingly. Now be warned the last 90 days do not guarantee the future and in fact, the funding rate could in theory go negative, again more on the risks later.
That 0.444 ETH we have left is still sitting there earning nothing, let’s change that. In the past I used to lend this out, then when staking came along I began to do that. In this case, we will use BETH which is Binance’s staking token. Instead of staking, you can just buy the token with the ETH. For most of its life, BETH traded at a massive discount so you could have bought it then and earned a bonus, currently, it is trading at a 0.035% discount after fees, so marginally better than 1:1 and you don’t need to wait a few days to start earning. This yield is auto-compounding and looking at the last 90 days it had a yield of 4.79% which is 0.0213 BETH or 38 USDT
Now we can take this 0.444 BETH and use it as collateral to borrow ETH, Binance allows you to continue to earn yield on the collateral. With the ETH we then buy more BETH then borrow more ETH and buy more BETH, risky? sure, but that's a problem for later.
By this method, we should be able to borrow about 0.9 ETH and buy an extra 0.9 BETH. The loan will cost us, based on the average of the last 82 days, 1.57% and again it will yield 4.79%. So overall this is an extra 52 USDT.
So on our $1,000 starting amount at the start of the year, we’d have about $1,154 which is a return of 15.4%, not too bad for what so far we have claimed is 0 risk. Fine, it is time let’s look at the risk.
The risk
First, a risk that is usually the biggest and the one most overlooked by retail traders, that is the cost of not earning the risk-free rate, ie a short-term US bond. That’s at 5.18%.
Next in this trade, we are not using USD but USDT, this has a risk. What that risk is is much debated online but I will point out that billions of USDT and assets priced in USDT are traded daily and the market has put a value of 1:1 on USDT. Now USDT does have a good bit of utility value over USD, for example it is quicker and easier to trade. So according to the market, the risk and the utility are about balanced. So what is the utility? My guess, it is about the cost of trading USD instantly across any border, let’s put it at 1% for now.
Next is the risk in the hedge, this can be adjusted depending on how much you split your initial funds to collateral, in this case, I split it 80:20. The risk comes from the possibility that the price of ETH could rise more than 30% and the 0.111 ETH you have as collateral will no longer be enough to cover your losses. As you will have plenty of BETH from the later parts of the trade you can always sell some of that to top up the collateral. In the 5 years I have done this trade I have never been liquidated, but I do use a lot of alarms and before a holiday or long flight I usually adjust my 80:20 split.
As a lot of people use futures to go long, you going short is providing a lot of utility, you are basically lending people money. So we can’t just say the APY is equal to the risk, so I need to make one of many guesstimates here, if you know what you are doing the risk is about 2%, of course, if you don’t know what you are doing, don’t do it the risk is way too high.
Ok onto the leveraging up on borrowed funds, as described we would owe 0.9 ETH and have 1.344 BETH so the price of BETH would need to fall below 0.92 ETH before we were liquidated. And unlike in the futures a liquidation here is not manageable, if the price falls to 0.95 and we decide to adjust the position we will be realising losses, a lot of losses.
So what is the risk that the ratio will fall below 0.92? I will be guessing again but let's break it down. As you can see in the image below the price has on occasion dropped below 0.92 but the last time was in late 2021. The main change since then is that BETH can now be exchanged for ETH on a 1:1 ratio on Binance. As well as that liquidity for BETH has increased, not just in the volume of this pair but through the addition of the BETH/USDT and BETH/BUSD pairs in spot and the BETH/ETH liquidity farming swap.
So no risk here? Not so fast, there is a 15-day waiting period for the BETH ETH 1:1 swap and a lot can happen in 15 days. More liquidity is not infinite liquidity. I could easily see a situation where there is a scare, founded or unfounded, of Binance being unable to honour their BETH and prices crashing before the 15 days it would take to avail of the 1:1 swap. So what do I think the risk is here, well it is earning us an extra 5% and I don’t see any utility here, so I would tend to agree with the market that the risk is about 5%.
The risk of Binance failing
So we have risks of 5.18%, 1%, 2%, and 5%, using a bit of maths to combine these (it’s not just adding), we get 12.6%, so we are getting an APY of 15.4% and the total risk is 12.6%, so it’s a good idea to do this trade?
Not so fast there is an overarching risk we have not dealt with yet, and that is the risk of Binance itself stealing or losing your funds, whether it be through stupidity or malice it is certainly a risk as we can see from history, mostly recent history. I am thinking BlockFi, FTX and going back a few years Bitfinex. I was personally affected by both Bitfinex and FTX.
This risk is a great unknown, while everyone claims to have known FTX was doomed to failure in the aftermath, in my opinion, it was not an easy thing to predict in the run-up. Of course, you will find many people that predicted FTX but you will also find many that predicted countless other bankruptcies that have yet to happen. Using the same inscrutable maths to find the difference between 15.4% and 12.6% we get my prediction for the market's prediction of Binance’s risk to be 3.2%.
I need to make a fair few notes at this point,
there are a fair few guesses in there from me that will affect the final number, I encourage people to change my values to your own to get a better final estimate.
I could and probably did make mistakes, in the calculations and also by perhaps missing entire risks.
Even if I am correct the market is not always correct, if it was there would be no money to be made.
With all that said personally I think Binance’s risk is less than 3.2% a year, which is why I have some of my funds in the trade described above. If you asked me last year I was using a risk of 1% for the institutional risk of keeping funds on Binance but in the aftermath of FTX and with increases in stories about Binance’s legal issues, I have increased that to 2% and reduced the amount of funds I have on Binance.
But remember, and I can’t overstate this enough, I am an Investing fool and you should not make any financial decisions based on my work.
Selling out
If you are interested in trying out Binance for yourself I do have an affiliate link that will earn me money if you use it to sign up, it will also save you on fees. I don’t like to encourage anyone to sign up to a site but if you have decided to do it anyway I do advise you to use an affiliate link even if it’s not mine as it is silly to pay more on fees than you need to. But be warned I also had an affiliate link for FTX and the 3 people that used that likely regret it now.