About Slicing Pizzas and Forks — Part 2

Mar 8, 2018

How the cryptocurrency world probably works

Let’s say you bought 50 shares of Google. You bought each share at the price of 1 USD, having therefore spent 50 USD on the purchase.

Let’s now say that Google paid 0.1 USD per share the year you bought your shares. You therefore received 5 USD as dividends. You are very smart: you earned a 10% ROI on your investment.

This amazing ROI skyrocketed Google shares: now it went to as much as 100 USD each share. Good for you: not only you had a 10% ROI on divedends, but also your shares are now worth 100x more.

Everyone seems to be happy but there is a little problem: everyone could buy a Google share for 1 USD, but not everyone can afford buying 100 USD shares. You can easily say that due to the higher price, Google shares lost a little bit of their negotiability.

There is a very easy fix for this situation, a fix that is very well known by any average stock market player: a split. A split happends when shareholders decide to split (sorry for being redundant) they shares in some ratio: 2–1, 3–1, 4–1 or any possible ratio. A 2–1 split means that if you previsouly owned 50 shares, with the split you now will be owner of 100 shares in total.

But what does this split means for Google? Does it mean that Google will now have twice the assets? No. Does it mean that Google employees will produce twice as much? No. Google’s productivity and equity will remain exactly the same, regardless of what shareholders do to their shares.

This means that the total profit annualy paid by Google won’t change either. But for this to be correct, Google profit per share will be reduced by half: if the profit remains the same and the shares double, the profit per share must shrink to half.

That was the logic I was applying to cryptocurrencies and using to measure coin splits. The (right) pizza logic: cutting it into more or less slices doesn’t make it any bigger.

But this logic, altough right for the stock market, is not correct when it comes to cryptocurrencies.

Evaluating cryptocurrencies

How much does a Bitcoin paid last year in dividends?

Bitcoin paid in dividends as much as dollars or euros did: nothing.

The reason for this is pretty straight forward: Bitcoin, Dollar or Euro are currencies and do not have productive means operating behind them. They do not guarantee you rights of any kind.

Someone once argued me during a lecture I was giving that the Brazilian real had the productive force of Brazil to support it. Really? I always had some Brazilian reais in my bank account and can’t recall receiving anything from the Brazilian government. Just the opposite: besides collecting taxes, I could easily notice my savings melt due to the rampant inflation of past uncontrolled governments.

There are only 2 things that determine the value of unballasted currencies (Iconic’s NIC has a ballast, by the way… 😜): supply and demand.

It is true that supply and demand also affect share prices. But regardless of the demand for a share, you will always be able to calculate the fair value of a share by dividing the company’s equity by the totality of shares issued.

You simply can’t do the same thing with coins, whether fiduciary or cryptocurrencies: there is (normally) nothing behind them.

So how can one say that Bitcoin is worth $ 10,000? Why not $ 100 or $ 100,000,000? It is not an exact science, of course. But supply and demand give us a way to look at: we can evaluate Bitcoin and other cryptocurrencies for how useful they are to us and to others.

If you look at the adoption level of Bitcoin back then when it was selling around $ 1.00, you’ll easily see that you couldn’t do anything with it. Back there, if you said to someone you got 1,000 bitcoins, people would think you own some pennies from some dumb game nobody plays.

This is the only thing that changed: Bitcoin now is widely adopted and known. You have utilities for it, you can exchange it for other things.

Forks: creating value out of nowhere?

A fork does not create value out of nowhere.

Unless a coin born of a fork already has wide adoption and utility, it would be hard to argue for value creation resulting from a fork. If utility and adoption are the keys, only time could provide those values to a recently-forked-coin.

But people could bet on the wide adoption. People could see the new coin as something the market would have demand for and price now the future they see in the coin. And so the price naturally increases.

And the adoption of the new coin does not necessarily imply the denial of the splitted one. Take exchanges for example: did they stop working with Bitcoin after Bitcoin Cash was born? They didn’t. The more the merrier for them.

Therefore, a fork can only create value when the forked coin is born and is adopted and used. If however it is born to steal adoption and uses from the previous coin, we should also be seeing a split in value.

This is the rational approach, of course. Most token buyers won’t think this way. For them, new coins equals new value, no matter what. Their actions will blur the market with overestimations of newly-forked-coins prices, so people should always pay attention during fork periods.

All that said, that girl’s approach on pizza slices may be correct in the world of cryptocurrencies. Sometimes slicing a coin could make the resulting market bigger. But sometimes it may remain the same; and other times slicing could make things smaller: just imagine a coin that loses its community and supporters due to a fork.

Lessons learned: when it comes to coins (not pizzzas), slicing it can mean anything.