Last year I took a job at Algebraix, now Permission.io. The remuneration package included a bundle of options and the promise of a stack of Permission tokens on the launch of the Permission.io platform. Like the options, the tokens would be locked up for a while, so they could not be immediately traded.
At the time, the question as to whether the tokens or the options would become more valuable never crossed my mind. “It’s a lottery”, was my thought.
I started to ponder the relationship between stocks and tokens when a Reddit post suggested that companies like McDonald’s might issue cryptocurrencies.
It provoked questions like these:
If the full corporate value of McDonald’s is expressed by the value of the stock, why would BigMacCoin ever have any value?
If BigMacCoin started to acquire a significant market cap, would the market cap of McDonald’s stock decrease by the same amount?
If I was the CFO of McDonald’s and wanted to raise money, would it make more sense to issue new shares, issue new bonds or issue BigMacCoin?
If I wanted to invest $10,000 in McDonald’s would it be better to buy BigMacCoin or McDonald’s Stock?
Having worked in the financial markets in my time, I’m pretty sure the answer to the last of these questions is: It wouldn’t matter.
That’s because arbitrage activity between McDonald’s stock and BigMacCoin would keep the two values in line with each other (assuming that the supply of both McDonald’s stock and BigMacCoin remained constant).
I’m less sure about answers to the other questions.
What Does Crypto Have Going for It?
Maybe you have friends who put a few thousand dollars into Bitcoin or Ethereum, sold at a good time and have been crowing about their 20 to 1 profit ever since.
You no doubt noticed that when you chose to plunge into the market last December (with your life savings) that Bitcoin fell to the floor like a Saturday-night drunkard. To be precise, it dropped from $19,760 to $6,200 (I know because I bear the scars).
That’s quite a precipitous fall, but before you decide to emulate it by throwing yourself off a tall building, look back at the history of Bitcoin. You will discover that it’s always been a Saturday night sot.
In January 2012 it lost 49% in 16 days.
In August of the same year, it shed 57% in a mere 3 days.
In April 2013 it dropped 83%, again in 3 days.
On 30th November 2013, after climbing to the sky (in those days $1163 qualified as the sky), it sank slowly to its knees for a year or so, losing 87% of its value.
And by the way, I failed to mention the many stumbles when it cast off anywhere between 30 and 40% of its value.
Bitcoin is like that. And it may or may not stay like that — it is difficult to say. But at the moment it is a speculative cryptocurrency that is not connected to any specific commercial activity. Its value is speculative, in the same way that the value of gold is speculative.
It is important that we do not confuse Bitcoin and the current speculative behavior of the crypto markets with what would happen if large corporations began to issue cryptocurrencies.
In fact, we could argue that the various air mile schemes of the airlines are close to being cryptocurrencies. Air miles are tokens that have value, which you acquire by airline travel. However, you can also buy them direct or acquire them by credit card use. You can buy things with them.
But you cannot trade them on a crypto exchange. They’ve never seen a blockchain, and if they met one down a dark alley, they wouldn’t know whether to run or say “Hi”.
If giant corporations issued crypto its value would be almost static, like that of air miles.
What Do Stocks Have Going for Them?
The virtue of stocks is that we’ve been trading stocks for centuries. Yes, they have had their ups and downs. They too can lose 60% of their value in a swift collapse; they just don’t do that so often. Stocks tend to be less volatile, partly because the market is much bigger and the mechanisms that keep it rolling are tried and tested.
Stocks are far more opaque than crypto tokens. Supply and demand determine their price. It tends to rise when there’s positive news about the company and falls on negative news.
Every quarter the company provides a financial report which gives anyone who cares to read it a clear picture of the company’s recent activity. The quarterly report often corrects the stock price to better reflect reality.
But, What if BigMacCoin Were Real?
Crypto tokens can be tied directly to the activities of a business, and if they are, they will provide a far clearer picture of how that business is doing.
Imagine what would happen if, at every McDonald’s, whenever a customer bought anything, what they paid (in dollars or euros or yen) was immediately exchanged for BigMacCoin. Imagine McDonald’s paying all their suppliers in BigMacCoin — which might be exchanged back into local currency.
For good measure, let’s imagine that BIgMacCoin is also traded on crypto exchanges. Now let’s presume that all BigMacCoin transactions are written to a BigMacCoin blockchain with their wallet addresses referring to the McDonald’s outlet that was involved in the transaction.
If BigMacCoin were the currency that McDonald’s used to account for, the whole of the accounts would reside on the blockchain and investors would be able to know, at any second, how McDonald’s was doing.
Instead of a quarterly financial report, there would be a real-time second-by-second financial report. Insider trading would be impossible because the outsiders would know as much as the insiders.
I guess that most CFOs would be horrified by this level of transparency.
But, honestly, would it be a bad thing?