Logical analysis of Binance’s reduction of holdings and MGX investment: motivation and market impact

Author: Biupa-TZC Source: X, @biupa

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

1. Valuation of minority equity investment

During my work at a foreign investment bank, I participated in a minority equity investment transaction (Minority Stake Investment Deal). In the transaction at that time, the buyer was a European pension fund asset management institution, the seller was a Chinese company, and our bank served as the buyside advisor (Buyside Advisory). In this type of investment transaction, the buyer needs to determine the valuation of the target company, so a complex valuation model is usually constructed.

We used an Excel model with dozens of worksheets (Tab) to perform valuation calculations to ensure 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, the two parties usually need to conduct multiple rounds of negotiations to reach a consensus on the transaction price.
From the perspective of investment logic, the process of MGX's investment in a minority stake in Binance is likely to be similar. In the transaction, MGX needs to model the valuation of Binance and negotiate with Binance on valuation and investment conditions.

The transaction price/valuation will be the core issue of the entire transaction. If the buyer can lower the price, it can increase the return on investment (IRR/MOIC); if the seller can raise the price, it can increase its own income, and the two have a conflict of interest. This is also what I think is the origin of Binance's sell-off in January.

2. Background and investment methods of MGX

MGX is an investment platform jointly established by Abu Dhabi sovereign wealth fund Mubadala and technology group G42, with the attributes of a semi-sovereign fund. Mubadala is known for its high salaries. Most of its staff members come from foreign investment banks in Europe/Hong Kong/the United States, and some have jumped from private equity funds (Mega Fund), so the team is highly professional.

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

The final transaction price has not been disclosed to the public. Only professional institutions such as investment banks, lawyers, and auditors related to the transaction can see the specific data. Commonly used calculation methods may include P/E, EV/EBITDA, EV/AUM, etc. Here you can refer to how American sell-side analysts value Coinbase, the logic is similar.

3. Binance's asset composition and reduction amount

In the valuation of traditional enterprises, assets mainly refer to fixed assets, and will be evaluated by professional institutions (such as JLL, Cushman & Wakefield). As the world's largest crypto trading platform, Binance's asset side includes not only fixed assets, but also a large number of cryptocurrency holdings.

According to Binance's public proof of reserves, its own assets can be calculated by subtracting "customer net balance" from "Binance wallet balance".

January 1, 2025: Binance holds approximately 50,000 BTC, 3 billion USDT, 220,000 ETH, 6 million BNB, 450,000 SOL, 70 million FDUSD, 100 million XRP, 700 million USDC, etc.

February 1: Binance holds about 2,700 BTC, 270 million USDT, 150 ETH, 5 million BNB, 4,000 SOL, 30 million FDUSD, 90 million XRP, 1.3 billion USDC, etc.

From the data, Binance significantly reduced its holdings in January:
50,000 BTC (about 5 billion US dollars)
220,000 ETH (about 700 million US dollars)
1 million BNB (about 600 million US dollars)
450,000 SOL (about 100 million US dollars)

USDT decreased by 2.7 billion, USDC increased by 1.3 billion, and the total stablecoin net reduction was 1.4 billion US dollars

A total of about 8 billion US dollars in crypto assets were reduced.

Fourth, possible reasons for Binance's large-scale reduction

Binance reduced its holdings of crypto assets by about $8 billion in January, accounting for the majority of its holdings. I think there are three main possible reasons

Easy to confirm valuation and reduce the impact of price fluctuations

Cryptocurrency prices fluctuate greatly, with a daily fluctuation of 5%-10%, and the liquidity discount problem is obvious. Cleaning up crypto assets before trading helps reduce valuation uncertainty and makes it easier for both parties to reach a consensus.

Matching MGX's investment preferences

As a semi-sovereign fund, MGX's investment may not only pursue financial returns, but is related to the Abu Dhabi government's investment attraction/national strategy. Therefore, MGX is more likely to focus on Binance's core trading business and is not very interested in buying its crypto assets. Binance may proactively divest crypto assets before the transaction to match MGX's investment preferences.

Dividends to old shareholders

Binance may use part of the cashed-out funds to distribute dividends to old shareholders by reducing its holdings of crypto assets, so that old shareholders can obtain cash before the transaction. MGX can acquire a stake in Binance's core business at a lower price, achieving a win-win situation.

V. Market Impact Analysis

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

BTC: The total net inflow of ETFs in January was US$5.25 billion, and the BTC reduced by Binance was worth US$5 billion, which basically offset the two

ETH: The total net outflow of ETFs in January was US$660 million, and Binance reduced its holdings by US$700 million, which was basically equal to doubling the outflow of ETFs.

If Binance had not carried out this round of reduction, the closing prices of BTC and ETH in January might be higher than 102,500 and 3,300. BTC could also hit an ATH price higher than 109,000 in January. However, since most altcoins (including ETH) have fallen in mid-to-late December, it is still unknown whether the market can reach a new high in January as a whole, even without the selling pressure from Binance.

My estimate is that without the selling pressure from Binance, ETH tends to close in the red (above 3,300) in January, but the closing price may be lower than the opening price of 3,700 in December. The corresponding altcoins may also rise slightly from December 31, but still lower than the high point on December 7.

The decline in February is mainly due to the tariff/recession uncertainty brought about by the Trump administration, which has little to do with the selling pressure from Binance.

VI. Future Outlook

After MGX's investment, I think it is neutral or positive for the currency market as a whole. MGX uses stablecoins to invest in Binance, which means that Binance's asset side has added stablecoins. These stablecoins may be used for market making/borrowing/repurchasing cryptocurrencies, thereby improving the liquidity of the currency circle. If MGX requires Binance to no longer hold cryptocurrencies and only operate as a pure exchange, because there is almost no cryptocurrency in Binance's existing assets, this will no longer have a negative impact on the future market.
If Binance only sells for the convenience of valuation + shareholder dividends, it still has plans to enter the cryptocurrency market in the future. As the market gradually falls/bottoms out in March, it may be bought back as a potential bottom-fishing force, which is potentially beneficial for the bottoming out and rebound in the future market
As a private enterprise, Binance really has no obligation to tell us in advance about the sale of coins in January. This is not the only case of information asymmetry that retail investors are subject to in this market.

Given that things have already happened and the negative news has already come out, the overall market outlook is still optimistic. With the decline of US stocks, it may give us a good opportunity to buy at the bottom. If the stablecoins in Binance's hands do something in the second half, maybe the second round of the bull market will be more exciting.