Kucoin Exchange: While the FTX bankruptcy continues to produce a growing list of casualties, a pervasive sense of fear has gripped the market leading to speculation that other crypto exchanges, most recently KuCoin exchange, may be next.
KuCoin is a global exchange that claims to be “trusted by over 20 million members”. Its token (KCS) has lost US$300 million in market capitalisation (market cap) over the past month, some 35%. And most recently, KCS lost US$30 million in market cap within the last 24 hours alone, down close to 9%.
But why the concern? Countless Twitter accounts have noticed that KuCoin is offering some rather incredible annual percentage rates (APRs) on digital assets, exceeding 200% in some cases.
And what bad timing this revelation has come, as crypto lender BlockFi just filed for bankruptcy.
KuCoin’s Twitter account, which has 2.3 million followers, sought to address the matter through its CEO Johnny Lyu, rather than make a formal statement.
Instead, the Singapore-based chief executive pointed to a tweet by a user called @TraderWize and said: “We’ve been getting many questions regarding the Dual Investment Product, which differs cordially from other high-interest guaranteed products. This is a clear introduction about the product and I urge users to understand the risks involved before trying new trading products”.
It’s unclear why both KuCoin and Lyu failed to make reference to any information regarding the product in question, preferring instead to refer to an anonymous Twitter user’s thread.
KuCoin exchange’s “Dual Investment” product explained
Apparently the APRs on offer that has given rise to concern are in relation to a “Dual Investment” product and not other high-interest products which are “guaranteed”. What does KuCoin’s website actually say about it?
According to its website, “KuCoin Dual Investment is a type of non-guaranteed high-yield structured financial product. The APR and settlement date for a product is fixed at the time of purchase. However, the settlement coin type shall be determined based on a comparison of the target price and the settlement price upon settlement of the product. Two coin types can be used for purchasing the same underlying asset. For example, in the case of BTC, you may use BTC itself or USDT”.
If that seems as clear as mud, you are not alone. Fortunately, Binance offers the same product which is preceded with a bright yellow warning.
According to Binance, a “Dual Investment gives you an opportunity to buy or sell cryptocurrency at your desired price and date in the future, while earning high interest yield no matter which direction the market goes”. Now that’s a little easier to understand. Here’s an explainer (albeit it a little technical) as to what that involves.
Dual investment involves two different digital currencies:
- A cryptocurrency that is not pegged to the value of US$1, such as Bitcoin, and;
- A stablecoin that is pegged to US$1 such as Tether (USDT) or Binance USD (BUSD).
There are two broad strategies offered, ‘sell-high’ and ‘buy-low.’ Sell-high enables you to pick the price at which you are willing to sell the cryptocurrency at a specific settlement date. Buy-low allows you to select the price you are willing to buy the cryptocurrency at a particular date. Each product has an associated target price, annual percentage yield (APY), and settlement date.
To illustrate, here is an example with Bitcoin and BUSD as the currency pairs:
- With sell-high, an investor gives the exchange the right to buy their cryptocurrency from them at the target price on the settlement date in return for a given APY. If Bitcoin is higher than the target price, the exchange will take your Bitcoin and provide you with 1 Bitcoin worth of BUSD + interest. If Bitcoin is lower than the target price, the exchange will return your Bitcoin to you and provide you with interest in the form of Bitcoin.
- With buy-low, an investor gives the exchange the right to sell them their Bitcoin at the target price on the settlement date for a given APY. If Bitcoin is lower than the target price, the exchange will sell you their Bitcoin at the target price plus a return in Bitcoin. If Bitcoin is higher than the target price, the exchange will not sell you the Bitcoin but provide your return in BUSD.
How it works
Here’s a video that explains how dual investment works:
If you’re not someone who intuitively grasps this, what’s the long and short of it?
The main difference with dual investment products is that unlike other crypto yield products, the principal (i.e. your initial investment) is not guaranteed. In other words, it’s more risky and you could lose more than you put in – unlike conventional interest-bearing assets where you are in principle “guaranteed” to receive more than your initial outlay.
What’s the big deal?
Stepping back, it’s certainly unusual for a major exchange not to issue a statement when faced with concerns over its future, much less rely on one by an anonymous Twitter user whose argument is essentially, ‘But Binance offers the same product’.
That aside, Binance clearly does offer the product in question and there aren’t immediate signs that it is in trouble, although that hasn’t prevented some from speculating.
However, what makes this all somewhat concerning is that yield-generation has been pushed front and centre following the FTX debacle. That was, after all, the carrot Scam Bankster-Fraud dangled in front of users to persuade them to deposit their crypto on FTX. KuCoin isn’t Binance in terms of its size and most likely, its balance sheet. Given that it also was hacked in 2020 for US$250 million, you’d imagine that risky yield-generating products would be revisited, especially at the present time when these sorts of things are under the microscope.
KuCoin exchange: Balance sheet
It isn’t clear at this stage what KuCoin’s balance sheet looks like and how much of its KCS token it holds. But it’s evident that the market is losing confidence in it, given that it is down 35% over the past month.
Cumulatively, these factors have led to sceptics making calls that KuCoin is on the way out and is desperately in search of liquidity (i.e. user deposits), partially explaining why its APRs are fluctuating wildly.
It’s of course true that KuCoin previously offered these products, as has Binance. So to that extent, triple-digit APRs is not in itself the issue. It’s that, coupled with the recent past of yield-generation leading to FTX’s demise and it being closely scrutinised, the fact that its token is tanking and a history of being hacked that leads one to believe that there may be more to this story.
We’ll be keeping a close eye on this one, as some speculate on who may be next in line to fall.