After digesting the article titled “How Bitcoin Solves the Value Store Problem” from @ Mind / Matter published in Bitcoin Magazine on August 1, 2021, I found myself unsatisfied. While consistent with the article’s central premise, that bitcoin acts as a store of value better than any other major asset, more could be said about the relative flaws of other assets – many of which are fatals – compared to bitcoin. In the next series of articles, I will explain the relative unattractive nature of (i) stocks, (ii) fixed income, (iii) commodities, and (iv) venture capital. My writing and my perspective is influenced by my upbringing as an ordinary man (blue collar, pleb), which is consequential because the ordinary man demands a store of value to preserve his work at a time when the financial institution has turned its back. Bitcoin fulfills this need much better than any existing alternative and is the only asset that does not represent a transfer of wealth from ordinary humans to pre-existing financial elites.
Trading in company stocks or common stocks has grown in popularity significantly since the imposition of government lockdowns. With the advent of commission-free online brokerage houses, stock trading is more accessible than ever to ordinary people. Despite their popularity, misconceptions abound about what a “stonk” really represents. Socrates said that the beginning of wisdom begins by calling things what they really are, and therefore I will try to define a stock. The less sophisticated monkeys among us think of a stock as the “digital representation of a business”. These are a few capital letters on a screen with the understanding that if a business experiences a favorable event or is expecting an event, the letters on their screen will increase in value and vice versa. There is a halfway heuristic that characterizes stocks as “fractional ownership shares of a company’s after-tax cash flow,” a definition that is admittedly more precise but potentially more ruinous. As fun as it may be to invoke our inner Warren Buffet, we lack his 12-digit float and, more importantly, ignore all the ways in which after-tax cash flow can be manipulated or misallocated, leaving shareholders with no money. nothing.
My definition of a stock is simpler and captures some of the risks conveniently overlooked by other definitions. A common stock is a claim of residual ownership over a company. Residual because every business is made up of a hierarchy of claims, with stonks sitting at the absolute bottom of the scale. A stylized version of this scale of values could be (i) bank lenders at the top and entitled to the interest associated with their loans, as well as the right to repossess and sell certain assets (think machines or intellectual property) , followed by (ii) holders of unsecured bonds who are entitled to interest and, in the event of liquidation, are second in line after bank lenders have been indemnified, and finally (iii) shareholders who have right only to the value – if any – that remains. In many cases, the excess value is actually negative, and blue collar workers are misled into spending their hard-earned after-tax dollars on infallible long-term loss (this is SEC sanctioned; sorry, they don’t care. Caveat emptor).
Consider a not-so-atypical company with $ 10 billion in debt, a market cap of $ 3 billion (value of all its stonks), and $ 100 million in cash. Now suppose its debt is trading at 50 cents on the dollar. The whole company is worth $ 7.9 billion (50% of $ 10 billion plus $ 3 billion minus $ 100 million). Bondholders owe $ 10 billion, but the company only has $ 100 million in cash and a total value of $ 7.9 billion. Unless the company can refinance on favorable terms, bondholders are likely not to be fully repaid and the stock is worth at most $ 2.1 billion.
What do you get when you combine a negative stock value with stock prices that are limited by a lower limit of zero (the stock prices on your screen cannot trade below $ 0)? If you had guessed the volatility, you would be right. A paradise for traders. Like flies to guano, newsletter shills, YouTube scams, and Twitter talking heads come down with pre-loaded bags looking for speculators to throw at. In an attempt to generate cash out, they make up stories of an impending pump. Their stories are simple and consist of a possible short squeeze, revival hopes or last minute bailout funding. The pump is self-created; they sell while explaining that “this is only the first step in a race” and that the suction cups hold the bag. Without the over-indebtedness, this situation would have been impossible (see Hertz and soon AMC for relevant examples). As an ordinary shareholder, you willingly accept almost zero rights to influence the actions of a company. If your CFO decides to issue more debt to pursue an ambitious project while decreasing the value of your equity, there is nothing you can do.
All shareholders rely on management teams they are often unfamiliar with without realizing how their incentives can differ. Corporate CEOs are keenly aware that their working lifespan is similar to that of NFL receivers or Goldman Sachs partners: two to three years to do something or they are replaced. How do these incentives align with low-maturity preferred shareholders who think in 10-year increments? CEOs know they will be well paid if their risky maneuvers seem to have worked in the short term and will be long gone when the consequences of their actions manifest. Suckers, more commonly known as shareholders, suffer the consequences. The range of value-destroying behaviors in which management teams can engage is almost limitless: executing a merger with overpaying the target, expanding into new markets or risky product areas, hiring expensive consultants or paying premiums. exorbitant management and the possibilities go on and on. What happens when you combine relatively short intervals with bad long-term incentives? Ten-year returns that look more like altcoin charts. Deutsche Bank, once one of the world’s most revered financial institutions, has a 10-year yield of around 60%. General Electric, the industrial powerhouse responsible for electrification in the United States, making most of the MRI machines used in hospitals and making the jet engines we travel in, has a 10-year efficiency of 15% less. These returns are even more abysmal when inflation is factored in.
Bitcoin solves this problem
Bitcoin removes the agency problem associated with storing value. The ability to store value without having to face the risk of destructive value management is in itself a total multi-billion dollar addressable market. Most General Electric shareholders simply wanted to store value for the long term, but whether they understood the dynamics of the steam boiler power generation market, the nuances of the petroleum services industry, or the complex structure. of GE’s cross-holdings, they probably would have fared better. Structural failures in the stock market force savers to become experts on esoteric subjects while trying to store value. Simply put, Bitcoin solves this problem.
The issuance of ordinary shares is in no way limited by the offer. The ability of an asset to perform the function of a store of value is derived from certainty. As defined above, a stock is a residual receivable which can be subdivided ad infinitum. The marginal cost of issuing a share is close to zero and the supply is very elastic. If a CFO feels his company’s stock price is overvalued, he will monetize that premium by issuing new stocks for cash or use those stocks to buy assets that the company may or may not need; new talent is attracted by stock-based compensation while new companies can be acquired through stock transactions. Stock prices typically decline with these announcements, as pre-existing shareholders now own a smaller percentage of the company. The only certainty you have as a shareholder is that your well-being is considered the last and that the rules of the game will keep changing. Marketing over time is an impossibility with an ever-changing set of rules. When purchasing a single Bitcoin, a holder is confident that they own one twenty-one millionth of a monetary network for an indefinite future – a level of certainty that could never be replicated by any action.
Shares can only be held on fully KYC accounts of retail brokerage firms, such as Robinhood. When you buy Apple stock on Robinhood, your name isn’t even added to the share certificate. You are simply the beneficial owner of a Robinhood account with shares “in the name of the street”, ie shares held by Robinhood. Robinhood-type brokerage firms sometimes lend the shares in your account to short sellers in exchange for often large fees. Typically, account holders do not receive any share of these fees. You cannot transfer your shares to someone else, sell them outside of trading hours, or use them as collateral. Calling this arrangement “property” broadens the definition of the term. I failed to mention that when Apple’s hypothetical share was purchased, Robinhood auctioned your order to the highest bidding high-frequency merchant.
With these facts, the Gamestop debacle can be rationalized and serves as a metaphor for the stock market at large. Our leaders will fight for your right to pay high fees to their donors, but remember to remember your place. The rules that secure your place at the bottom of the food chain are less important than staying at the bottom of the chain, and the rules can be changed to ensure that. Bitcoin introduces the concept of radical self-ownership, where the rules are consistent for all participants in the network – true meritocracy.
In conclusion, as the dollar implodes slowly but surely, stocks have become de facto stores of value, even if they are unsuited for this role. Most actions are preferably short-lived distractions with the explicit goal of enriching everyone in the value chain except you. By speculating on stock price movements, you are entering a negative expected value game with many more ways to lose than to win. Without in-depth knowledge of the industry or the company, you are wasting both your capital and your time, which are one and the same.
Stop wasting time and buy bitcoin. Your future self will thank you.
In my next article, I will discuss bond market flaws.
This is a guest article by Joao de Oliveira Salazar. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.