After digesting the piece entitled, “How Bitcoin Solves the Store of Value Problem” by @Mind/Matter published in Bitcoin Magazine on August 1, 2021, I found myself unsatiated. Although in firm agreement with the central premise of the piece, namely that bitcoin performs the store of value role better than any other major asset, more could be said about the relative flaws of other assets — many of them fatal — in comparison to bitcoin. In the following series of articles, I will elucidate the relative unattractiveness of (i) equities, (ii) fixed income securities, (iii) commodities and (iv) venture capital. My writing and perspective is informed by my upbringing as a common man (blue collar worker, pleb), which is consequential because the common man is crying out for a store of value to preserve their labor at a time when the financial establishment has turned its back. Bitcoin addresses this need far better than any existing alternative and is the only asset that does not represent a wealth transfer from the common man to pre-existing financial elites.
Equities
The trading of corporate equity or common stock has dramatically increased in popularity since the imposition of government lockdowns. With the advent of no-commission online brokerages, stock trading is more accessible to the common man than ever before. Despite their popularity, misconceptions abound about what a “stonk” actually represents. Socrates said that the beginning of wisdom starts by calling things what they truly are, and so I’ll attempt to define a stock. The most unsophisticated apes among us view a stock as the “digital representation of a business.” They’re a few capitalized letters on a screen, with the general understanding that if a business experiences a favorable event or the expectation of one, the letters on their screen will increase in value and vice-versa. There is a mid-wit heuristic that characterizes equities as “fractional ownership shares of the post-tax cash flows of a business,” a definition that is admittedly more accurate but potentially more ruinous. As amusing as it is to invoke our inner Warren Buffet, we lack his 12-figure float and, more importantly, ignore all of the ways post-tax cash flows can be manipulated or misallocated, leaving shareholders with zilch.
My definition of an equity is simpler and captures some of the risks conveniently forgotten by other definitions. A common stock is a residual ownership claim on a business. Residual because each enterprise is composed of a hierarchy of claims, with stonks sitting at the absolute bottom of the ladder. A stylized version of this ladder of value could be (i) bank lenders at the top and entitled to interest associated with their loans, as well as the right to repossess and sell certain assets (think machines or IP), followed by (ii) unsecured bondholders who are entitled to interest and, in the event of a liquidation, are second in line after the bank lenders have been made whole, and finally (iii) stockholders who only have a claim to whatever value — if any — is left. In many cases, the excess value is in fact negative, and blue collar workers are misled into plowing their hard-earned after-tax dollars into a surefire loss over the long run (this is sanctioned by the SEC; sorry, they don’t care. Caveat emptor).
Consider a not-so-atypical enterprise with $10 billion of debt, a $3 billion market capitalization (value of all its stonks) and $100 million in cash. Now assume its debt is trading at 50 cents on the dollar. The entire enterprise is worth $7.9 billion (50% of $10 billion plus $3 billion minus $100 million). The bond holders are owed $10 billion, yet the company only has $100 million in cash and a total value of $7.9 billion. Unless the company can refinance under favorable terms, it’s likely the bondholders will not be fully repaid and the stock is worth negative $2.1 billion at most.
What do you get when you combine a negative equity value with share prices that are constrained by a zero lower bound (the stock prices on your screen can’t trade below $0)? If you guessed volatility, you would be correct. A trader’s paradise. Like flies to guano, the newsletter shills, YouTube frauds and Twitter talking heads descend with pre-loaded bags in search of speculators to dump on. In an attempt to generate exit liquidity, they craft tales of an imminent pump. Their stories are simple and consist of a possible short squeeze, hopes of mean reversion or last-minute rescue financing. The pump is self-created; they sell while simultaneously explaining that “this is just the first leg of a run” and the suckers are left holding the bag. Without the debt overhang, this situation would have been impossible (see Hertz and soon to be AMC as relevant examples). As a common stockholder, you willingly accept almost zero rights to influence the actions of a company. If your CFO decides to issue more debt to chase a moon-shot project while impairing the value of your equity, there is little to nothing you can do.
All stockholders rely on management teams they often know little about without appreciating how divergent their incentives can be. Corporate CEOs are fully aware that their career lifespans are similar to those of NFL wide receivers or Goldman Sachs Partners: two to three years to do something or they are replaced. How do those incentives align with low-time preference shareholders who are thinking in 10-year increments? CEOs know that they will be well compensated if their risky maneuvers seem to have worked in the short term and will be long gone when the consequences of their actions manifest themselves. The suckers, more commonly referred to as shareholders, suffer the consequences. The range of value-destructive behaviors that management teams can engage in is almost limitless: executing a merger by overpaying for the target, expanding into risky new markets or product areas, hiring costly consultants or paying exorbitant management bonuses and the possibilities continue indefinitely. What happens when you combine relatively short intervals of bad incentives over the long term? Ten-year returns that seem more like altcoin charts. Deutsche Bank, once one of the world’s most venerable financial institutions has a 10-year return of approximately negative 60%. General Electric, the industrial powerhouse responsible for electrifying the United States, producing most of the MRI machines used across hospitals and manufacturing the jet engines we fly in, has a 10-year return of negative 15%.These returns are even more abysmal when inflation is taken into account.
Bitcoin Fixes This
Bitcoin removes the agency problem associated with storing value. The ability to store value without having to grapple with the risk of value-destructive management is a multi-trillion dollar total addressable market in itself. Most of General Electric’s shareholders simply wanted to store value over the long term, but if they understood the dynamics of the steam boiler power generation market, the nuances of the oilfield services sector or the complicated cross-holding structure of GE, they would have likely fared better. The structural failures of the equity market force savers to become experts in esoteric topics while attempting to store value. Put simply, Bitcoin fixes this.
Common stock issuance is in no way supply constrained. An asset’s ability to perform the store of value function is derived from certainty. As previously defined, a stock is a residual claim that can be subdivided infinitely. The marginal cost of issuing a stock is close to zero and supply is highly elastic. If a CFO feels his company’s stock price is overvalued, he will either monetize that premium by issuing new shares for cash or use those shares to buy assets the company may or may not need; new talent is lured with stock-based compensation while new companies can be acquired via stock trades. Share prices typically decline with these announcements because pre-existing stockholders now own a smaller percentage of the company. The only certainty you have as a stockholder is that your welfare is considered last and the rules of the game will keep changing. Salability through time is an impossibility with an ever-changing rule set. When purchasing a single Bitcoin, a holder has the certainty of owning one twenty one millionth of a monetary network for the indefinite future — a level of certainty that could never be replicated by any stock.
Stocks can only be held in the fully KYC’d accounts of retail brokerages, like Robinhood. When purchasing a share of Apple on Robinhood, your name is not even added to the stock certificate. You merely are the beneficial owner of a Robinhood account with shares “in street name,” i.e. held by Robinhood. Robinhood-like brokerages sometimes lend the shares in your account to short sellers in exchange for fees that are oftentimes material. Typically, account holders don’t receive any share of these fees. You cannot transfer your shares to anyone else, sell them outside of trading hours or leverage them as collateral. To refer to this arrangement as “ownership” stretches the definition of the term. I failed to mention that when the hypothetical share of Apple was purchased, Robinhood auctioned off your order to the highest bidding high frequency trader.
With these facts, the Gamestop debacle can be rationalized and serves as a metaphor for the wider stock market. Our leaders will fight for your right to pay their donors high fees, but be keen to remember your place. The rules that secure your place at the bottom of the food chain are of less importance than you remaining at the bottom, and the rules can be changed to assure it. Bitcoin introduces the concept of radical self ownership, where the rules are consistent for all participants of the network — a true meritocracy.
In conclusion, as the dollar slowly but surely implodes, stocks have become de facto stores of value, even though they are ill-suited to the role. Most stocks are lowtime preference distractions with the explicit purpose of enriching everyone in the value chain except you. By speculating on stock price movements, you are engaging in a negative expected value game with enormously more ways to lose than win. Without a wealth of specialized sector or company knowledge, you are wasting both your capital and time, which are one in the same.
Stop wasting time and buy bitcoin. Your future self will thank you.
In my next piece I will discuss the flaws of the bond market.
Thanks.
This is a guest post by Joao de Oliveira Salazar. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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