Jun 24, 2021
[7 min Read]
Investment Thesis: PancakeSwap (CAKE) offers unparalleled yields and acts as a primary gateway into the promising Binance Smart Chain ecosystem.
Over the past few weeks, the cryptocurrency market has seen heavy pullbacks across the board. Bitcoin, the largest crypto asset, has shed about 50% since its all-time highs over a month ago and is currently trading at USD$32,500 at the time of writing. This drop has been echoed by almost every other cryptocurrency regardless of sector, product offering, or market cap.
In the equities market, it is commonly observed that during periods of economic downturns, a stock's beta is likely to approach 1 (i.e. stocks tend to move in the direction of the broader market). An analysis of correlations in price action across various crypto-assets shows that this is also widely true for the cryptocurrency market. For example, over the last 50 days, Ethereum (ETH) had a correlation of 0.839 with relation to Bitcoin; for the period 50 days prior, that correlation was 0.629. Though both are relatively high, this dramatic spike can be seen virtually across the board (Note: Bitcoin is used as the 'broader market' in this comparison due to its high market dominance).
This is important to factor as, though the outlook of this report will highlight multiple bullish cases for the PancakeSwap token, it is likely that the short-term price action will be heavily dictated by the narratives that move the prices of Bitcoin and the broader cryptocurrency space.
PancakeSwap is a decentralized exchange operating on the Binance smart-chain, and offers the following services:
Originally a hard-fork of the SushiSwap project for Ethereum, PancakeSwap has reaped many benefits of the increasing number of projects listed on the Binance smart-chain. This migration has come predominantly due to the faster network speeds and lower/more predictable transaction costs. That, alongside easy porting from EVM to BSC, has made it relatively easy for projects to shift over.
For said projects looking to transition to the BSC or are looking to build on it, PancakeSwap offers a suite of products that both draw users to new projects and allow projects to issue their tokens in a decentralized way. By offering rewards and yields for staking, new projects can reward early holders often with 3-digit APYs, fostering a strong community of eager investors. PancakeSwap will also help in the initial offerings of the token, using their native token (CAKE), as well as BNB, to facilitate the sale. This helps the project raise primarily in BNB, which benefits the projects in being a larger, more transactable coin.
In the future, PancakeSwap aims to provide more trading and banking services such as borrowing/lending and margin trading. This will allow it to further cement itself as the one-stop-shop for DeFi services on the Binance Smart-chain. One key thing to monitor is whether the implementation of margin trading will require the introduction of KYC/AML. Currently, PancakeSwap can operate will full anonymity and without any signup by simply connecting a BSC wallet. That being said, almost all fully-fledged 'trading platforms' such as Binance, FTX, Huobi, require information about the user, and to verify their identity. Being able to use leverage would be completely unique for a majority of the smaller coins listed on the BSC, as those would not have listings on the larger, more centralized exchanges. Ideally, they would be able to offer this while maintaining the ease and secrecy of its current product offerings but these new offerings are key catalysts to look out for.
The CAKE token is the utility token that helps users unlock the products on the PancakeSwap ecosystem. By nature, CAKE is inflationary since about 530,000 CAKE tokens are emitted daily through the farms, pools, and lottery prizes. This is after burning about 622,000 CAKE daily from transaction fees, IFOs, Profile Creations, lottery tickets, and the auto-cake pool. To date over $2 Billion worth of CAKE has been burned. Much like with Bitcoin, new tokens are minted as blocks are validated, and those tokens are issued to the miners - in this case, miners are those who have staked their CAKE tokens. It is likely therefore that the mining yield will eventually decrease such that the amount burned is greater than the amount minted (i.e. 25 CAKE minted per block down from 40), though that has the risk of reducing the incentive for users to stake their tokens.
The reasons to back the PancakeSwap token include market, risk, and strategic competitive advantages.
Conducting a comparable analysis with the other popular decentralized exchanges can show how key metrics affect valuation, and if PancakeSwap has reason to be considered 'undervalued'. For this analysis, Sushiswap, Uniswap, Quickswap, and MDEX were considered appropriate comparable tokens due to their similar product offerings and market share. It is key to note that MDEX operates on both the Huobi network, as well as the Binance Smart-chain, and the other comparable platforms only operate on the Ethereum network.
The key metrics considered were the 24hr and 7-day volumes, 24hr fee collections, liquidity, token holders, number of transactions (24hr), and the number of pairs available to trade. Of these, the 7-day volumes showed to have the highest correlation with market cap (fully diluted). Across the variables, it is shown that PancakeSwap is undervalued compared to its peers, however, if Uniswap is removed as an outlier, PancakeSwap is properly valued, if not slightly overvalued. This can be used as a relative range and will aid in understanding the upside and downside potential of holding the token. Using the 3 highest correlated variables: 7-day volume, Liquidity, and number of pairs, they are aggregated to show that the potential range of valuations for the CAKE token is between USD$2.33 Billion and USD$6.19 Billion. This corresponds to a high price of $33.29 and a low of $12.52. It is important to note and reiterate that this is an idiosyncratic analysis, and the overwhelming systematic risk driven by the prices of Bitcoin and the cryptocurrency market (as highlighted at the beginning) will consistently shift the above goal posts.
There is a qualitative argument to make that in two categories, liquidity ****and number of token holders, PancakeSwap greatly outperforms its peers. This is an important observation since it suggests that even during this time of massive sell-offs, many have been willing to hold on to their tokens and keep them on the platform. This may, however, be explained by the great yield potential that Pancake offers its holders.
The 138% upside vs 10.7% downside seems like an unrealistic target, however, there is still a major factor that helps to relieve a lot of CAKE's downside risk.
The largest factor is the ability to stake CAKE for passive income. As mentioned above, staking is the act of pooling tokens to help validate new blocks on the blockchain. This enables users to earn block rewards every time a new block is added to the blockchain (40 CAKE/block at the time of writing). By doing so, users can earn between 70-140% APY on their idle tokens. The yield varies depending on the token's price and amount of staked tokens, however, the re-staking pool has consistently given triple-digit yields since its inception earlier this year. The popularity of this service is reflected in the fact that 140 of the 186 million tokens in circulation are in either the auto-cake or manual-cake pools. Although the price falling will reduce the yields on these pools, one would beat the S&P500 10-fold just by holding the token if the price simply remained stagnant (nominal, not risk-adjusted). Furthermore, even those who purchased near the top of the most recent cycle would still outperform the broader crypto market due to this form of passive diversification.
There is a counter-argument that having such a high percentage of circulating supply within two staking pools defeats some of the purposes of having a utility token, however, those users are still able to vote on future projects, including expansions into NFTs as well as leveraged trading. The fact that the number of holders of the coin is second-to-none when it comes to exchange tokens is a great indication that CAKE is helping to redistribute its yields in a way that truly satisfies the decentralized distribution goal that the cryptocurrency industry was designed to deliver.
Future endeavors are also looking to reduce price volatility through lock-up periods. By ensuring tokens cannot be withdrawn for a certain period allows for high yield promises, as well as ensuring that liquidity is locked up and reduces risks of FUD-induced flash crashes.
This analysis concludes that there is reason to be bullish on PancakeSwap for the mid-to-long term. Those who also believe that the broader markets are likely to range sideways for the foreseeable future should also strongly consider this as a way to diversify streams of portfolio growth by staking the token in one of the pools offered. That being said, it is highly likely that another move south for Bitcoin will result in similar results for the CAKE token.
All opinions are my own and should not be taken as financial advice.
All data used is publicly available on the websites of the respected exchange, or on Etherscan/BscScan.