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Cryptocurrencies like Bitcoin (BTC-USD) are such an unusual asset class in that they are uniquely bad when their price falls. As a value investor, I like assets that have fallen and are now cheap. Crypto has collapsed, but it’s still not cheap.
At
In fact, there is no price that makes it cheap. It’s one of the few assets that doesn’t get better as its price falls.
- If the S&P falls about 20% like it’s fallen this year, it becomes a higher-yielding investment going forward.
- On average, when the Dow or NASDAQ falls, its constituents become higher-yielding investments for the future.
- Even binary speculative stocks get a better reward-to-risk ratio as they get cheaper.
The mechanism in each of them is similar in that they offer profits, or in the case of speculative stocks, the potential for profits. When the price goes down, your investment buys more returns, making them better buys when the market price goes down.
Why revenue matters
I understand that the stock market feels like a popularity contest. Stocks rise and fall based on tastes and whims, but if we step back and truly understand the underlying valuation mechanics, it is inevitable that market prices will move in the direction of fundamental return potential.
In the long run, it’s a mathematical certainty that income matters.
It all boils down to what present value actually is – all future payments to shareholders are discounted to the present.
Every dollar earned eventually goes towards paying shareholders.
The most direct way is dividends, which are paid through current profits.
The indirect way is to reinvest retained earnings back into the business and in turn generate more revenue. The extra revenue will eventually allow for higher dividends.
Even in the extreme case of a company that never intends to pay a dividend, the increase in earnings still benefits shareholders by increasing the value at which the company is eventually bought out. See, the prospective buyers of the company are getting the profit stream as compensation for the takeover. So the higher the profit, the higher the price.
As such, earnings are important for all stocks, even for growth companies that don’t pay dividends. Earnings growth still translates into an increase in value, which is eventually paid out to shareholders in some way.
Why crypto is different
Earnings yield is inversely proportional to price, and when the denominator of earnings yield (earnings/price) decreases, earnings yield increases.
Crypto is unique. His earnings are $0, so he has a counter of 0.
When crypto topped the world with a total market cap of several trillions of dollars, its earnings yield was $0 over a few billion. When crypto collapses, it becomes $0 divided by a much smaller number.
Zero is a mathematically interesting number when it comes to ratios. If it’s the numerator, it doesn’t matter what the denominator is, the result is always zero. 0/X = 0.
This means that as an asset class, crypto is uniquely positioned to fall excessively and potentially permanently. It won’t be cheap. It doesn’t become attractive when the price goes low. It always has and will always have zero revenue.
Now, when I say that crypto has no income, I’m often met with a lot of dissenting opinions, so let me touch on some of those ideas right here.
Misconception of Income #1: Blockchain is a valuable technology that will bring tons of revenue
I agree that blockchain is a valuable technology and I think that it will be used for some important applications and generate plenty of revenue as a result. The problem with this is that owning cryptocurrency does not transfer any ownership whatsoever. Owning the Bitcoin cryptocurrency does not entitle one to any type of fee or royalty when using the blockchain, even if it is the Bitcoin blockchain.
There is no mechanism by which the owner of bitcoin crypto actually gets paid no matter how phenomenal blockchain turns out to be. I’ve written in more detail here about how owning crypto does not confer ownership of blockchain.
Misconception of Profit #2: Crypto staking generates profits similar to dividends
Staking is essentially a form of financial technique in which the number of shares is increased in proportion to the amount granted. It’s similar to a stock split, where anyone who owns McDonald’s stock now gets 2 shares for every share they previously owned. In this case, the value of each share decreases by half.
So investors now have two $50 bills instead of one $100 bill. No value was created, only some numbers were shifted.
It’s similar when companies pay dividends in shares instead of cash. A stock dividend is meaningless because the dilution in value per share offsets the increase in share count.
Misconception of Income #3: Legitimate businesses are getting involved in crypto and making money from it
Yes, there are countless reputable companies that are profitably involved in crypto. Their involvement is often viewed as a form of endorsement of crypto and is used to promote crypto’s legitimacy.
I don’t see it that way at all.
I see them as opportunistic companies coming to cash in on the latest market craze. In fact, the revenue they generate is functionally negative revenue for crypto investors. Let me elaborate on that.
Interactive Brokers (IBKR), Coinbase (COIN), Robinhood (HOOD), and many others charge fees and commissions in return for facilitating transactions. They make legitimate income from it, but where does that income come from?
The commissions and fees come out of the pockets of those investing in cryptocurrency. Hence, it is a functionally negative outcome for Bitcoin and other crypto investors.
Not too late to get off
I sincerely hope investors in crypto do not take this article as a personal attack. Please take it as a warning and an opportunity to save the residual value of your investment.
While I firmly believe crypto will go to $0, there is still time to get out. The hype machine is still going strong, and crypto providers continue to pour billions of dollars into advertising. Therefore, it is still possible to find someone willing to relieve you of your position.
I’ll close with one final thought — if an asset is truly valuable, it doesn’t take billions of dollars in marketing to convince others of its worth.
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