That's true for most non-dividend paying stocks though, isn't it? The price can only go up if other people buy too since holding the stock itself doesn't generate any income.
Would you call Peloton's VC backers "ponzi schemers"?
Non dividend paying company stocks are market speculation, not a ponzi.
Cryptocoins, not being part of a circular economy, must, by definition, keep attracting new money to pay for earlier investors. Sounds much like a pyramid.
A more apt analogy would be a public company that does not do any real economic activity and simply issues more shares to cover expenses. Cryptocoins cannot exist without the network running and the only way to cover those expenses is to attract new money without any product. While stock speculation is a zero sum game, cryptocoins are negative sum game. Quite a major difference in my book.
Again, the speculative value of cryptocurrencies is largely built on the belief that the dApps built on top of the network will have enough usage and revenues to justify the current valuations.
If you look at the revenues generated by OpenSea or Uniswap or Compound, it's not exactly an outlandish idea.
The speculative value of cryptocurrency is based on nothing more than the greater fool theory. ETH isn’t down 75% YTD because of discounted dApp cash flows, let’s be realistic here.
Peloton sells bikes for cash. That's real honest-to-goodness GDP. I can assume Peloton will make more economic value than it retally will, but at least it creates economic value.
What does Ethereum contribute to GDP?
And that's why it's worse than MLMs, at least those pretend to be retailers.
I'm just going to take a second to recognize the fact we're talking about "investing" in a currency and expecting 10x returns is nuts.
The best thing for crypto as a currency is for Etherium to be worth in 10-20 years exactly what it is now factoring in inflation. The fact that this is horrible for "Crypto" because this means eth won't be giving the 10-100x returns, is exactly what's wrong with the whole thing.
Its not a company, you know. Just because it has "market cap" slapped onto it, it still doesn't mean anything. You should be saying, "A host of companies made $10 billion collecting fees for transacting in Etherium". Western union had $5.3 billion in revenue last year and is valued at $4.9 billion. No one bases the value of the US Dollar on how much fees you can collect in exchanging it.
> No one bases the value of the US Dollar on how much fees you can collect in exchanging it.
But that's precisely what currencies are largely valued on - the value of transactions conducted in that currency, and the speculative direction of those transactions.
Why do you think the US dollar is a stronger currency than, say, the Pakistani rupee? The US dollar is used to pay for more transactions AND speculators make a directional bet that the Pakistani economy won't be as robust as the US economy or that the US dollar's hegemony won't be threatened in the short-term.
If you have a speculative belief that Ethereum will power the digital economy, it is reasonable to value it at XX price.
Look, if you have a belief that Ethereum will power the digital economy, you should have no problem waiting until it does, and just use it within the digital economy. I use Venmo to buy random things from vendors at Art and Wine festivals , pay back some friends for dinner and (probably to crypto's envy) I pay for a legit therapist that I get rembursed from insurance (just not on venmo). Right now, I have $70 on my balance from people paying me back.
If I have a speculative belief that Venmo will rise above Cash.App, PayPal and crypto and end up powering the digital economy, even to the point that a major Blue Shield insurance company would send me reimbursements on it, should I be putting my savings into its balance? What should I value my money on Venmo? What utility would there be for holding ETH in that balance vs USD, besides sheer speculation that ETH would rise in value?
Now you're talking about value, which is entirely subjective. As far as GDP, Ethereum spawned an entire new industry with tons of companies paying actual salaries to people (in fiat, if I might add), all of whom bought lattes and cars and houses, and some, I'm sure, also bought Peloton bikes.
Crypto currencies are like stock tickers. The price does not have to have any bearing on the actual value generated by the stock or the company it represents.
There is a speculative element to all markets, including the stock market. And I think you know that as well.
>Now you're talking about value, which is entirely subjective.
No it's not. When an asset prices in cash, that price is dependent on it's ability to generate future cash (Goods/Services price based on the utility from consuming that thing). If you think that model is wrong, then you are wrong.
>As far as GDP, Ethereum spawned an entire new industry with tons of companies paying actual salaries to people (in fiat, if I might add), all of whom bought lattes and cars and houses, and some, I'm sure, also bought Peloton bikes.
Oh no no no. You are not buying any of that when you buy Ethereum. We are not talking about whether or not Coinbase/Binance/etc. are Ponzi schemes. They offer services in exchange for fees. That is GDP full stop.
Again, I can argue they are bad businesses because their fees are dependent on a Ponzi Scheme, but they are not the Ponzi Schemes.
>Crypto currencies are like stock tickers. The price does not have to have any bearing on the actual value generated by the stock or the company it represents.
This is a very weird argument. When an acquirer wants to buy a company, they need to pay the stock (usually plus a premium) price to own that company. Stock prices reflect the theoretical takeout price of a company (and this is put into practice every day).
Cryptocurrencies are marketed to you as similar to stock tickers, but they are currencies (it's sort of in the name) and currencies are valued by the demand for goods/services/assets you can buy with them (i.e. this is why export economies, all else equal, have strong currencies).
I would agree that cryptocurrencies would go up in value if you could buy an increasingly large amount of things with them (and only them), but heuristics imply the exact opposite is true.
>There is a speculative element to all markets, including the stock market. And I think you know that as well.
You're really not getting that there's 'overestimate future cashflow' speculation (bad but not so bad) and 'funamental misunderstanding of the asset' speculation.
> No it's not. When an asset prices in cash, that price is dependent on it's ability to generate future cash
But that's precisely why people were valuing Ethereum at x,xxx per token - the belief that Ethereum will one day have the network effect to generate future revenues. And honestly, a lot of projects built on Ethereum did generate an absurd amount of revenue in a very short span of time.
OpenSea and Uniswap are probably the most prominent examples. Both generated a combined total of over $1B in revenue and used Ethereum as the fee token. The speculative price of Ethereum - or any other cryptocurrency, for that matter - relies on the belief that the number of apps like Uniswap and OpenSea will likely increase over the years.
> I would agree that cryptocurrencies would go up in value if you could buy an increasingly large amount of things with them (and only them)
That's precisely what's happening with Ethereum. There are more and more dApps that all use Ethereum to process transactions. There are even SaaS tools that you can pay for in Ethereum, with a single tap from your Ethereum wallet.
I feel like you're attacking me without fully understanding how this ecosystem works, nor have you actually ever used a dApp.
>But that's precisely why people were valuing Ethereum at x,xxx per token - the belief that Ethereum will one day have the network effect to generate future revenues.
Ok so let's go first principles here (ignoring the word soup that is "have the network effect to generate future revenues.")
For something to create value it has to do something that people are willing to pay for (in currency, goods, services, etc.). That's the GDP point.
Currencies just exist, they don't do anything themselves. People do things with them but the GDP value comes from what those people do, not the currency itself.
OK, you tell me, "but Ethereum facilitates transactions and people pay for those transactions with fees!"
But those fees go to stakers (who do provide a service, albeit a dumb one).
Ok so now you tell me "But yes, stakers need coins, and I'm buying coins now because I think there will be increasing demand for coins vs. a fixed supply!"
Which great, now we are back to "Currencies are valued by the demand for goods/services/assets you can buy with them (i.e. this is why export economies, all else equal, have strong currencies)."
In this case, what ETH buys is 'the right to earn transaction fees on the ETH network'
Great, again I love this. Feels like we are on to something.
But here's the rub: Are people actually buying anything Ethereum?
Are people buying goods with ETH? No, Ethereum is a very bad tool to buy goods/services with and in fact it's illegal to in most of the world (I'm serious, look it up).
Are people buying services with ETH? See above.
Are people buying assets with ETH? No.
What are they buying? Mostly other currencies.
And now we circle back to why it is a Ponzi scheme: nearly all of the transactions that "generate value" today are just people baying the currency because they think demand will be higher in the future. There is almost no outside value being brought in via "the only way I can buy this good/service/asset is via crypto, so I'll buy crypto because I want that good/service/asset"
If we get to a world where people are actually, ya know, using crypto to buy things, I'll buy into it, but surprise centralized databases are actually intrinsically way better at that than crypto is, but again, that's just my opinion that I've spent years thinking about, so good luck on your bet.
>I feel like you're attacking me without fully understanding how this ecosystem works, nor have you actually ever used a dApp.
I just hope you've though as much about the intrinsic nature of impermanent loss as I have, given all your confidence. I'll give you a hint, it's not impermanent and it's screwing you over 100% of the time.
EDIT: I'm going to head you off here, because I know the 'have you ever used a dApp?" is coming.
You can put as many layers on the above as you want, but if consumable goods and services aren't being purchased with your currency, then it's worthless, regardless of how many Liquidity providers there are on Uniswap.
> But those fees go to stakers (who do provide a service, albeit a dumb one).
That service is the point of the whole thing. The fees go to stakers who *execute your computation for you and ensure the integrity of the results*. ETH is analogous to credits on AWS. It's simply an execution environment with different properties from AWS.
Again. I don’t know how to say this enough times or clearly enough.
If people were buying goods and services with crypto then I would agree with you but they are not.
Right now it’s circular and moving in the wrong direction. People buy coins with fiat to pay stakers to buy other currency. That’s the only use case. And a big part of that is because what ETH does is actually one of the theoretically worst ways to buy goods/services imaginable.
That is why it’s a ponzi scheme no matter how similar it seems to non ponzi businesses.
Let’s put it this way, Lu Lu roe (or whatever that mlm scam was called) looks a lot like lululemon, except in one people bought the leggings because they liked them and in the other they bought the leggings to get rich.
Only one of those two was a ponzi, even if they both sold leggings.
Is amazon web services not a service people pay for? People are currently buying computation (a service) with crypto. I spend ETH to deploy and execute code, in the exact same way I pay USD to AWS to deploy and execute my code.
> As far as GDP, Ethereum spawned an entire new industry with tons of companies paying actual salaries to people (in fiat, if I might add), all of whom bought lattes and cars and houses, and some, I'm sure, also bought Peloton bikes.
Paying developers goes in the cost column, not the benefit column. (If you hire a bunch of developers and pay them to sit around twiddling their thumbs all day, you're not growing the economy but rather damaging it - they could've done something more productive instead). The question is what value the ecosystem produces that people are paying in for. And there's certainly a subjective element to that, but the market price should be a sanity check.
Peloton sells exercise bikes and delivers virtual spin classes etc.. And while you can certainly argue they're overvalued (and I'd agree with you, FWIW), it's easy to see how they're actually doing something valuable in the real world - something that, in a small marginal way, improves peoples lives. We can have a sensible conversation about whether a weekly Peleton class is worth $45/month, but people are paying that much for it, not as a speculative "investment" but as a simple exchange of money for goods and services. Real people are better off - in that they were able to take the class and get fitter or whatever. There's certainly a speculative element on top of that, but at the foundational level there's real value being produced.
Where's the product or service for Ethereum? They've had long enough to come up with one. People used to talk about doing cross-border currency transfers (genuinely useful) or that cat breeding game (potentially genuinely fun), but nowadays fees are too high for either of those to be worthwhile and people don't really talk about them. It's not just excessive speculation on top of a fundamentally sound business; there's simply no there there.
> As far as GDP, Ethereum spawned an entire new industry with tons of companies paying actual salaries to people (in fiat, if I might add), all of whom bought lattes and cars and houses, and some, I'm sure, also bought Peloton bikes.
This is like the Broken Window Fallacy.
All that money that was spent building Ethereum could have been spent on activities that were far more useful to society.
> All that money that was spent building Ethereum could have been spent on activities that were far more useful to society.
Like all the billions that went into building...Facebook?
Again, I don't understand how you can get into the morality of it all when literally tens of billions of venture funding goes into everything from juicers (remember Juicero) to companies that literally help instigate ethnic cleansings [0]
Facebook is hugely valuable. Making it easy to share photos, organise get-togethers, or message your friends, is directly making people's lives better. (And complaining that messaging systems allow people to send negative messages is throwing the baby out with the bathwater; do you blame the telegraph or the telephone for "literally helping instigate ethnic cleansings", which in a literal sense they undoubtably did?) Even Juicero, which is very much the exception rather than the rule, was a real product that helped make people happier and healthier (just, not by $400 worth - which is why it rapidly collapsed in the market, as it should).
"Non dividend paying" is a bit of a red herring since companies have started doing buybacks instead (for tax reasons). Ultimately it's the voting rights that can make the company pay dividends.
If you've got a non-voting non-dividend stock .. you might want to ask what you've actually got there.
A lot of tokens give "voting" rights in the form of governance if its run as a DAO
Some tokens share revenue with token holders. GMX, for instance, distributes all of the nearly $2M daily fees it generates to holders of the GMX token. Goldfinch, which loans to real-world microfinance companies, also gives back its fees to Goldfinch token holders.
Some tokens are necessary for paying for transactions or any on-chain asset (most core blockchain tokens).
Gold is a consumption good (jewelry) that people choose to treat as an asset (so much so that they forget that it was originally valuable because it was our most easily smithed/mined metal that rulers liked to adorn themselves with).
Shareholders own shares of the company, and the company owns assets. For example, Uber owns some data center equipment. If the company were liquidated, that equipment would be sold and the proceeds distributed to creditors, bond-holders, and share-holders.
We're about to see this process unfold for FTX. How exciting!
Companies behind non-dividend paying stocks can own assets and make profits and shareholders own these assets and profits. The value of these assets and profits somehow anchor the stock price, the price can go significantly below reasonable valuation in short time frames, but in a long run market will correct cases where you can buy 100$ worth of assets for 50$.
(also companies often use the profits to buy back own stocks, in which case the price goes up without any people buying)
From a set of companies that do not pay dividends, companies that do not generate profits are a small subset. Many companies in the SP500 index do not pay dividends, but one of the conditions of inclusion in the SP500 index is for a company to generate profits. Unprofitable companies may well be very similar to any blockchain app, although you have more signals to analyze their future profitability potential.
First, stock buybacks are not tax exempt. If a firm earns $100 in profits and buys back $50 of shares, it still pays the corporate taxes on $100, not on $50. Unlike paying interest, corporations don't get to write off money spent on stock buybacks. So it doesn't affect their tax situation.
Second, for the investors in the company, the total aggregate amount of taxes is paid whether the investors are holding 10 stocks and get $1 per stock in dividends, or if they are holding 5 stocks and get $2 per stock in dividends. The number of shares outstanding does not raise or lower the ultimate value of the dividend stream, nor the tax obligation applied to the dividend stream.
What if a company never pays any dividends and just buys back stock? Then it's value is just the terminal liquidation value, and each time investors sell stock back to the company, that is a taxable event for them, probably taxed at the long term rate which is the same as the dividend tax rate, up until the company winds down, in which case the rest is taxed at the long term rate. The set of taxable events is the same as if the company had paid dividends, but the difference is that investors self-select as to who realizes the gain and who doesn't.
Really this is the difference when companies buy back stock -- some shareholders don't want to take any gains, while others do. The total gains are the same, and the total paid to the government is the same, and the time it's paid to the government is the same, but investors can sort themselves into those who want to to take the gain and those who don't. You get to decide when you want to take the gain, and this optionality has value for you. It's as if you could signal to the management -- don't pay out a dividend, re-invest the money that you would have paid out this quarter so that I'll get more later. That's basically what is going on for the individual investor, but for the government, they still get their quarterly taxes paid just in terms of capital gains by those who sell their shares.
What I mean that the tax you pay on dividends is often more than the capital gains tax. So you might prefer that the company spend money to prop up the share price by buying back stock rather than paying it out as dividends.
Perhaps there was some tax reform since I last looked, but generally speaking dividends are taxed at the long term capital gains rate. So they would be the same or less than capital gains (short term capital gains are just treated as income). I am not a tax accountant :)
But I agree that many do prefer buybacks, for the reasons I outlined -- it gives investors a choice as to when to realize the gain. Some investors may not want to receive the gain each quarter. And this can be a tax benefit, not because the rate is different, but because the timing may be more convenient.
Would you call Peloton's VC backers "ponzi schemers"?