Crypto IV: On stock investing vs. crypto investing

Marton Trencseni - Sat 21 January 2023 - Crypto

Introduction

In the last 3 posts I argued against the real-world usefulness of cryptocurrencies and pointed to its ponzi-like nature. One counter-argument of a sort could be that regular stock-investing is also ponzi-like; after all, if I buy a piece of Microsoft stock (MSFT) at \$1, and then sell it at \$2, somebody now has to enter the market at \$2 to buy it from me. So for that person to make money and sell at \$3, somebody else has to enter the market... and so on. So it sounds like from an investor perspective, there's no difference in the basic dynamic — or is there?

All articles in this series:

Profitability

I would say that for most investors, from their own perspective as an investor, there is no major difference first-order difference. You buy a stock or a crypto-something for \$1 and you would like to sell it for \$2 in the future; what happens to the underlying asset is secondary, as long as the price went up.

But I would argue that there is a big difference. When buying MSFT stock, you are buying fractional ownership in an economic machine that generates value — profits. With stock, you can always run the following thought experiment: if you buy up 100% of the stock, you now own and control the company. From now on, you can keep 100% of the annual profits. You can hire and fire people, change the company's product strategy, enter new markets or leave markets, and potentially make even more profits. The point is, with stock, you buy fractional control of a company that is (hopefully) generating profits. A good example of this, at the time of writing, is Elon Musk buying 100% of Twitter, taking over the company and taking it private.

With cryptocurrencies, this is not true. There is no underlying company or other asset. If you buy 100% of a cryptocurrency, there is nothing that you can control, there are no profits to keep.

Okay, but what about companies whose stock has a positive USD value, but they are not profitable? For example, Uber is its 14th year, is not profitable, but you can buy (and sell) a piece of Uber stock, for about \$30 at the time of writing. Some investors are buying this stock because they believe eventually Uber will be profitable; for these investors, the above thought experiment still works, it's "just" that after buying 100% of the company, they have to wait some time to start collecting profits. This sort of belief of course also plays an important role for already profitable companies; different investors have different ideas (fantasies) about future profitability of their portfolio companies. Other investors are of course speculative, irrespective of the profitability of the underlying asset.

Fractional ownership vs market cap

The previous thought experiment gets even more interesting when applied to cryptocurrencies. First, let's go back to the stock example. The price of a stock multiplied by the number of shares outstanding is the market cap(italization) of a company (note that not all stock may be available for purchase on open stock markets). In our thought experiment, if we buy 100% of the stock, does it change the market cap of a company? The market cap is related to the (future) profitability of the company, so fundamentally it is not affected by ownership changes.

However, I would argue this is not the case with a cryptocurrency like Bitcoin. Bitcoin also has a market cap calculated in a similar fashion as above. However, if you buy 100% of Bitcoin, I would argue the market cap would actually be \$0, because:

there is underlying asset, so there is no value coming from there
if a single person controls all of a currency, it's useless as a currency, so it can't be worth anything

As a result, a cryptocurrency like Bitcoin has a weird property: the more you buy of it, the less valuable it becomes!