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Author Topic: Value of bitcoin denominated shares will eventually approach 0?  (Read 6891 times)
JohnDoe
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May 15, 2011, 12:52:05 AM
 #1

I’ve been thinking, how will it be possible for shares traded in a currency that has a limited supply to rise or even maintain their value? The more valuable bitcoins become, the less profit a company will be able to generate and the less valuable their assets will become (in bitcoins), so there should be a downward pressure on the price of its shares. An example:

Company A issues 1000 shares at 1 BTC each to buy some equipment that will generate 50 BTC in monthly profits. After a couple of months the price of bitcoins have doubled and so the company can only generate 25 BTC. Company B is born and issue 1000 shares at 0.5 BTC to buy the exact same equipment (which now only costs half the amount of bitcoins) and generate 25 BTC. Shareholders of company A start selling their stock to buy from company B since they can get double the amount of shares on a company that’s basically a clone of the previous. Finally the prices of A’s stock fall until they level out with B.

Is my logic terribly flawed somewhere?

Btw, if this holds true I’m not suggesting that just holding bitcoins would always be better than buying stock since even if your stock loses value you can still make more than your initial investment from dividends.
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May 15, 2011, 01:19:35 AM
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I’ve been thinking, how will it be possible for shares traded in a currency that has a limited supply to rise or even maintain their value? The more valuable bitcoins become, the less profit a company will be able to generate and the less valuable their assets will become (in bitcoins), so there should be a downward pressure on the price of its shares. An example:

Company A issues 1000 shares at 1 BTC each to buy some equipment that will generate 50 BTC in monthly profits. After a couple of months the price of bitcoins have doubled and so the company can only generate 25 BTC. Company B is born and issue 1000 shares at 0.5 BTC to buy the exact same equipment (which now only costs half the amount of bitcoins) and generate 25 BTC. Shareholders of company A start selling their stock to buy from company B since they can get double the amount of shares on a company that’s basically a clone of the previous. Finally the prices of A’s stock fall until they level out with B.

Is my logic terribly flawed somewhere?

Btw, if this holds true I’m not suggesting that just holding bitcoins would always be better than buying stock since even if your stock loses value you can still make more than your initial investment from dividends.

Just look at what electronics manufacturers do.  They have to deal with this problem all the time.  The idea that you just buy a fixed cost and that's it is highly unrealistic as well.  A lot of your costs would move with the value (electricity and labor get cheaper, etc...).  If the company does not spend all of its money initially and has reserves, they do just fine.

But if a company is making less revenue, then it's value probably drops.  Unless it was already anticipated and priced in.
JohnDoe
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May 15, 2011, 02:15:19 AM
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Just look at what electronics manufacturers do.  They have to deal with this problem all the time.  The idea that you just buy a fixed cost and that's it is highly unrealistic as well.  A lot of your costs would move with the value (electricity and labor get cheaper, etc...).  If the company does not spend all of its money initially and has reserves, they do just fine.

But if a company is making less revenue, then it's value probably drops.  Unless it was already anticipated and priced in.

You are right about costs going down as well but I'm not sure that it solves the problem. Let's say that all bitcoins have been mined and a very profitable private company makes a public offering. Where does the money to buy their stock come from? It can't come from newly created money like in fractional reserve systems, it has to necessarily come from what other people are already holding. Everyone's piece of the pie ends up getting smaller to leave room for the new player.
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May 15, 2011, 02:20:52 AM
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Just look at what electronics manufacturers do.  They have to deal with this problem all the time.  The idea that you just buy a fixed cost and that's it is highly unrealistic as well.  A lot of your costs would move with the value (electricity and labor get cheaper, etc...).  If the company does not spend all of its money initially and has reserves, they do just fine.

But if a company is making less revenue, then it's value probably drops.  Unless it was already anticipated and priced in.

You are right about costs going down as well but I'm not sure that it solves the problem. Let's say that all bitcoins have been mined and a very profitable private company makes a public offering. Where does the money to buy their stock come from? It can't come from newly created money like in fractional reserve systems, it has to necessarily come from what other people are already holding. Everyone's piece of the pie ends up getting smaller to leave room for the new player.

And what is the problem with that?

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May 15, 2011, 02:31:15 AM
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If a company cannot bring in more bitcoins than they spend they ought not be using up resources. They should be leaving them for others who have productive plans to use.

Currently we have a system where you need to buy something whether you know what you need or not, whether you know what is a good plan or not, whether you know what is valuable or not. Holding the currency should be a general bet on the whole economy. Using it should be a claim that you have a better than average idea.

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JohnDoe
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May 15, 2011, 02:36:04 AM
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And what is the problem with that?

You buy shares at 1 BTC but eventually they'll trade at 0.1, no matter how profitable and efficient the company is. As I said, you could possibly still end up making money from dividends but it would only be slightly more attractive than just holding the bitcoins in your wallet. Basically this will become harder and harder until it becomes impossible when no new BTC is mined.

If a company cannot bring in more bitcoins than they spend they ought not be using up resources. They should be leaving them for others who have productive plans to use.

Currently we have a system where you need to buy something whether you know what you need or not, whether you know what is a good plan or not, whether you know what is valuable or not. Holding the currency should be a general bet on the whole economy. Using it should be a claim that you have a better than average idea.

I agree, not sure what this has to do with what I'm talking about though.
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May 15, 2011, 02:50:46 AM
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You buy shares at 1 BTC but eventually they'll trade at 0.1, no matter how profitable and efficient the company is. As I said, you could possibly still end up making money from dividends but it would only be slightly more attractive than just holding the bitcoins in your wallet. Basically this will become harder and harder until it becomes impossible when no new BTC is mined.

Sure, but you are not seeing the other side: the product that cost 1 BTC would then cost 0.1 BTC.

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May 15, 2011, 03:19:05 AM
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You buy shares at 1 BTC but eventually they'll trade at 0.1, no matter how profitable and efficient the company is. As I said, you could possibly still end up making money from dividends but it would only be slightly more attractive than just holding the bitcoins in your wallet. Basically this will become harder and harder until it becomes impossible when no new BTC is mined.

Sure, but you are not seeing the other side: the product that cost 1 BTC would then cost 0.1 BTC.
He has a point.

He's not talking about the buying and selling with the end consumer.  He's talking about encouraging investment in other companies.

Generally, value of a company can be determined by a price/earnings ratio.  If a company makes 10 BTC in a year, and it is valued at 100BTC, the P/E ratio is 10.  If the same company can only make 1 BTC the next year, because of deflation, then the value will likely drop from 100BTC to 10BTC.

That means, that every investor who invested in the company would lose money compared to just holding on to their bitcoins in the first place.

This is an inherent flaw with a deflationary currency, and one that there is no easy answer around, aside from not investing in companies in the first place.  Unless the value of the company can outpace the value of the bitcoin, there is no reason to invest in a company.  Less investment = less innovation = less economic activity.
JohnDoe
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May 15, 2011, 03:19:50 AM
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Sure, but you are not seeing the other side: the product that cost 1 BTC would then cost 0.1 BTC.

Yes I know that the purchasing power stays roughly the same. Again, if I had just left alone that 1 BTC in my wallet instead of buying the shares I would have the same 1 BTC at the end instead of 0.1 (disregarding what one might possibly get from dividends obviously).
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May 15, 2011, 03:23:04 AM
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And what is the problem with that?

You buy shares at 1 BTC but eventually they'll trade at 0.1, no matter how profitable and efficient the company is. As I said, you could possibly still end up making money from dividends but it would only be slightly more attractive than just holding the bitcoins in your wallet. Basically this will become harder and harder until it becomes impossible when no new BTC is mined.

If a company cannot bring in more bitcoins than they spend they ought not be using up resources. They should be leaving them for others who have productive plans to use.

Currently we have a system where you need to buy something whether you know what you need or not, whether you know what is a good plan or not, whether you know what is valuable or not. Holding the currency should be a general bet on the whole economy. Using it should be a claim that you have a better than average idea.

I agree, not sure what this has to do with what I'm talking about though.

Why are you insisting that no company will ever be more profitable than the average of the growth of the bitcoin economy?

It'll be hard to tell which ones, but you don't have to. If you don't have an edge at resource allocation just leave it to other people.

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May 15, 2011, 03:44:00 AM
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Why are you insisting that no company will ever be more profitable than the average of the growth of the bitcoin economy?

It'll be hard to tell which ones, but you don't have to. If you don't have an edge at resource allocation just leave it to other people.

You are not getting what I'm saying, maybe SgtSpike's post will make it more clear than mine.

Think of it like this, can stock denominated in BTC rise in value forever like normal stock can? (value meaning units of currency, NOT purchasing power).
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May 15, 2011, 04:20:36 AM
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I think i know what he's getting at.

An example:

Stock A is an extremely stable company that makes no losses, and also makes no gains ( i know no one would invest in it but it provides an example). It could be something like bottled water, which has a constant value at all times. Anyway we agree this value *never* changes, its completely constant.

BTCs however rise in value, so if you buy Stock A then its initial value in BTCs is say, 100. But as time progresses its BTC cost goes down, not because the company loses, we agree its perfectly constant, but BTC value goes up. So with enough time that company will be worth 50 BTCs..... but its *value* is still the same. It's the BTCs that have changed. So why bother investing in a company when you can just keep the BTCs? The company is a great inflation hedge, but a terrible deflation hedge.

Now lets take Stock B, Company B is a mildly profitable. But its profits do not outstrip the deflation of BTCS. So if you own 100 BTCs of Stock B, then after the same time as above, instead of being worth 50BTCs its worth 75BTCs. Its still profitable, the value *has* gone up because it is higher than constant value company A, but its still only 75BTCs. Once again... why bother investing in it when you could have just kept 100BTCs?

The only way for this to work is for Stock C, Company C is INSANELY profitable. They exclusively produce an antiaging serum and charge insane prices for it. Their stock actually goes up because profits outstrip deflation, 100 BTCs worth becomes 150 BTCs after the allotted time.

So, to answer the original poster... BTC based stocks have to outstrip the deflation rate in order for those stocks to be worthwhile. Store of value stocks, like Stock A, or mildly profitable stocks, like Stock B, are not worthwhile investments in a deflationary currency scenario. Both stocks however are worthwhile in an inflationary currency scenario.

If however BTCs become very stable, then the deflation rate might be low enough that its relatively easy to outrun deflation. I'm not sure if this will happen with bitcoin in particular though.

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May 15, 2011, 04:48:53 AM
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The flaw here is that the thinking is based on the idea that BTC will continue to rise in value so quickly. In the long run, BTC will deflate exactly at the speed the economy grows. So if the company you invest in grows more slowly than the economy in general (or not at all), then yes, it would have been better to just keep your BTC.

But this is true for dollars as well. If you invest in a company which grows more slowly than the stock market in general, you would have been better off investing in a basket of stocks from the whole market. If you had, you would have reaped the benefits of the stock market growth, instead of the puny growth of the company you invested in.

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May 15, 2011, 04:57:15 AM
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The flaw here is that the thinking is based on the idea that BTC will continue to rise in value so quickly. In the long run, BTC will deflate exactly at the speed the economy grows. So if the company you invest in grows more slowly than the economy in general (or not at all), then yes, it would have been better to just keep your BTC.

But this is true for dollars as well. If you invest in a company which grows more slowly than the stock market in general, you would have been better off investing in a basket of stocks from the whole market. If you had, you would have reaped the benefits of the stock market growth, instead of the puny growth of the company you invested in.

EXCEPT, we'll be losing BTC as people lose wallets, etc.  And that'll probably happen a lot faster than people anticipate, despite best laid plans.  That deflation won't be due to growth of the economy, so it must be taken in to consideration when making investment calculations.

I do see your point here though.  Difference being, holding on to bitcoins is kind of an "automatic" holding of the Dow Jones.  Smiley
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May 15, 2011, 06:06:13 AM
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Well...

One of the ideas of investing in stock is, as someone said, an inflation hedge. I don't see how that doesn't apply to Bitcoins. With fiat currency you want to generally invest in stocks since it's always getting inflated, but let's say the Fed announces a huge increase in their interest rate, would you want to get out of the market? Maybe you should. Now with Bitcoins, you should get into the stock market when you expect the economy to shrink. If I had bought some stock yesterday at $8.5/BTC, I would have made a killing today at $6.

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May 15, 2011, 10:27:04 AM
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Yes you could just keep a hold of your bitcoin, and hope that you can live off your hoard for the rest of your life. Certainly, with the level of appreciation we're seeing at the moment, a good stash of 10kBTC would in perhaps 2 years time make your life very comfortable.

But this exponential growth of the purchasing power of BTC will not last forever. At some point you will need to earn btc to replace your spent hoard. This can be done by purchasing shares of bitcoin denominated companies that pay dividends. No more will people buy shares in the hope they will just rise in value (as a hedge against inflation) but they will buy for the income stream they can earn from those shares.

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May 15, 2011, 01:50:41 PM
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The flaw here is that the thinking is based on the idea that BTC will continue to rise in value so quickly. In the long run, BTC will deflate exactly at the speed the economy grows. So if the company you invest in grows more slowly than the economy in general (or not at all), then yes, it would have been better to just keep your BTC.

Not sure the pace at which BTC rises in value is relevant. As long as the purchasing power of BTC goes up, the price in BTC of all assets will go down proportionally.

No more will people buy shares in the hope they will just rise in value (as a hedge against inflation) but they will buy for the income stream they can earn from those shares.

Yeah, that's all I'm saying. People will buy shares knowing that their value will decrease over time if they can be sure that they'll make up for it with income.

Someone said this is a flaw in a deflationary system since it becomes way harder to get capital for new projects. That's true but I think it may be more of a feature because you basically have to all but guarantee that the project will be profitable to attract investors. It is kinda like a system-wide protection against the business cycle since there shouldn't be malinvestments.
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May 15, 2011, 03:35:47 PM
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Someone said this is a flaw in a deflationary system since it becomes way harder to get capital for new projects. That's true but I think it may be more of a feature because you basically have to all but guarantee that the project will be profitable to attract investors. It is kinda like a system-wide protection against the business cycle since there shouldn't be malinvestments.

When your money is always dropping in value you have to invest it - use it or lose it. That kind of investment would go away in non inflationary system. But that investment was always poor investment: when people invest because they must, they won't invest in the best options. It won't be the ponderous long term investment which drives a healthy economy with small boom and bust cycles; instead it will be the frenzied day trading of Wall Street.

I would say that the amazing amount of poor investments being made today, such as that made into clearly failing mortgages, is due to printing press money and government meddling. I for one look forward to seeing what a truly free market could do instead. Imagine our prosperity when our best and brightest are putting their money into ideas which will actually work and lead to profit and truly new innovation, instead of running desperately in the financial instruments hamster wheel.

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May 15, 2011, 07:42:45 PM
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I bought a couple of shares over GLBSE on mining companies.

The reason is simple: They pay dividends. Unless I see a dramatical share decrease of value in USD (ie: suppose that BTC remained 8 USD while the company BTC value dropped to 0.1 of its original value), it is all profit.

In fact, I believe it will be profitable with BTC itself, as the company profits (it is a mining company... it will profit as fast as the market grows, at least for now).

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May 16, 2011, 02:30:28 AM
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The end result is that investments will be much more efficient, as people no longer HAVE to invest to keep the value of their savings locked in, so the only motive will be for people to invest will be good profit, not fear of losing their savings to inflation.


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