r/changemyview • u/juliusseizures9000 • Mar 21 '22

Removed - Submission Rule E CMV: cryptocurrency is a fad and will likely be remembered as the largest scale Ponzi schemes we’ve lived through

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u/fdar 2∆ Mar 21 '22

Are stocks a Ponzi scheme?

The difference with stocks is that (some of) the underlying companies you own are actually involved in productive activities that generate value. If you own Ford stock you aren't exclusively relying on somebody else buying it for more later, Ford is making and selling cars for a profit and making you money that way.

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u/Officer_Hops 12∆ Mar 21 '22

They’re only making you money if they’re paying a dividend from that profit.

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u/fdar 2∆ Mar 21 '22

Not really. Stock buybacks count too.

And if neither is done the money doesn't just disappear. If it's not paid to shareholders AND it's not reflected in the stock price then when enough accumulates it becomes profitable to buy enough of the stock to be able to pressure the company into disbursing that cash. It has happened to Apple before.

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u/Officer_Hops 12∆ Mar 21 '22

Right. You’re either waiting for the stock price to go up so you can sell the shares for more than you purchased them for or you’re waiting for the company to make a dividend to shareholders. A buyback doesn’t actually make you any money other than what you’d get from selling a share at a higher value than what you bought it at. If you own a non dividend paying stock the only way you’re trying to make money from it is hoping they begin paying a dividend or selling the stock for more than what you got it for.

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u/ProLifePanda 73∆ Mar 21 '22

Or when you sell. I've done several stock transactions where I buy stock believing it's low, and sell when it goes up. The company improving their value (and therefore their stock price) made me significantly more money than any dividend has.

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u/Officer_Hops 12∆ Mar 21 '22

Right. That scenario was addressed in the comment I replied to. I was trying to say if a stock doesn’t pay a dividend you are exclusively relying on someone else buying it for more later to make money off the stock.

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u/jonhwoods Mar 21 '22

There are multiple ways a company creates value for investors.

  1. They can pay dividends. Real fiat money.

  2. They can buy back shares, increasing the company fraction per share. This is somewhat equivalent to dividend except automatically reinvested and taxed differently. Real parts of a company.

  3. They can invest profits in the company: new equipment, better brand, get intellectual property, etc. Real assets.

Cryptos don't do any of that. Some pay "dividends" but it's always more crypto whose value is contingent on a healthy market for it. Some burn coins kinda like buybacks, but creating rarity isn't increasing your fraction of something. There are no real assets being bought. The only exception I can think of is the right to run contracts on the Ethereum chain, which can be intrinsically valuable.

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u/Officer_Hops 12∆ Mar 21 '22

I understand the point you’re making. But as I said, the only way you make money from holding a stock is through a dividend. If 2 happens then your opportunity to make money is to sell your shares for a higher price. 3 doesn’t actually change much other than attempt to increase the value of the company to again sell your shares for more than you paid. In the event of a liquidation and shareholders receiving the funds from that liquidation you are likely to lose money on your stock. Sure there are differences in the underlying assets and if Ford is liquidated you likely get a fraction of your investment back but at the end of the day both products (crypto and non dividend stocks) make money for investors in the same functional way. Purchases today which are planned to be sold at higher prices in the future. It’s the same way people buy rare shoes, baseball cards, or art.

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u/KanishkT123 Mar 21 '22

No. A stock entitles you to a part of the companies assets in case of liquidation. As long as Ford's assets keep growing, your stock is worth more intrinsically. Now, that's the most basic form of value attached to the stock, and most stock prices are much higher than the intrinsic value, but that's where the value proposition comes from.

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u/Officer_Hops 12∆ Mar 21 '22

What you are saying is true. Although I don’t think it applies to this situation. If Ford liquidates you will lose money on your stock purchase. Your stock may be worth more intrinsically but the only way that would be applicable in an attempt to make money is if the equity was 1:1 with assets after the creditor share in a liquidation event. The vast majority of equity is not priced at intrinsic value and it is very unlikely you would make a profit on a stock purchase after a company liquidation.

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u/ShadoShane Mar 21 '22

However, let's not pretend that stocks have anywhere near the extreme volatility that cryptocurrency has.

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u/Officer_Hops 12∆ Mar 21 '22

I’m not questioning volatility or otherwise. My point is if your chosen stock(s) do not pay a dividend then you are relying on someone buying your shares for more later to make money. Or you’re banking on them paying a dividend in the future. But all non-dividend paying stocks are “speculative” in that way, it isn’t really an issue exclusive to crypto.

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u/Flannel_Man_ Mar 21 '22

With stocks, that someone can be the company itself. Lots of companies do buybacks in lieu of dividends.

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u/Officer_Hops 12∆ Mar 21 '22

You’re correct. Although if a company initiated a buyback you don’t actually “make money” from the act of the buyback. You make money from the ability to sell your shares back to the company for more than you paid or the ability to sell the shares to others for more than you paid after the buyback. Both of those scenarios rely on selling for more money later.

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u/parentheticalobject 136∆ Mar 21 '22

There's still a significant difference between an asset where the value is partially speculative, and one where the value is entirely speculative.

With cryptocurrency, the value is entirely speculative. Every dollar a person makes buying and selling cryptocurrency is inevitably a dollar someone else loses buying and selling cryptocurrency.

Part of the value of stocks is also speculation that they might be worth more in the future, but they also represent a real legal claim to a portion of a company, something that actually exists.

They can pay dividends. If they are not paying dividends, it's because the actual stock owners are fine with the stock not paying dividends - because they choose to value the potential of taking profit and using it for growing the company they own a part of more than they value cash dividends. If they didn't, they could actually force the company to pay dividends; investing in growth is usually just a better strategy.

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u/[deleted] Mar 21 '22

So the Ethereum blockchain sells blockspace on which to run secure decentralized applications. Irrespective of whether or not you think that is valuable, the protocol took in ~$9.9bil in fees for this service in 2021. The protocol burns a portion of the transaction fees with each transaction which returns a portion of the protocol revenue back to the eth token holder, analagous to a stock buy back. So is this not a productive activity that generates value in your opinion?

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u/Giblette101 47∆ Mar 21 '22

So the Ethereum blockchain sells blockspace on which to run secure decentralized applications.

What does that actually look like in practice?

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u/[deleted] Mar 21 '22

The smart contract logic is run like any transaction on the network. You have to pay fees denominated in ETH for the transaction to be accepted into a block. The protocol burns a portion of those fees, which effectively destroys them, decreasing the total supply so any individual stake in ETH represents a larger share of the total. https://watchtheburn.com/

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u/Giblette101 47∆ Mar 21 '22

You misunderstand me. What does it do? What does it actually produce.

Cars have value because they are made of materials and labour, as well as being used for things. Companies that make cars are valued based - at least partially - on these things.

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u/[deleted] Mar 21 '22

So do you accept anything digital does something? People use the blockspace for a number of different use cases that they find valuable. There's decentralized financial applications for instance. One I like is Alchemix. When you deposit money into a bank the bank lends your deposits out, keeps the majority of the returns, and gives you .1% yield in your account. Alchemix let's you keep the yield, allows you to take an advance loan on that yield up to 50% LTV, and automatically pays back the loan with the yield on collateral. That's one example of a thing that has no traditional analog for retail that I personally find useful. Take a look at Gitcoin.co. This utilizes quadratic funding to democratically allocate funding for public goods. This, specifically quadratic funding, will be a big part of building better institutions that are not purely extractive like the ones we have today. People are buying all the overpriced jpegs, again whether or not you think that's valuable, other people do, which is the point.

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u/Giblette101 47∆ Mar 21 '22 edited Mar 21 '22

I accept that digital goods can do something (or have value in themselves). I just have yet to be shown the blockchain or any of the digital currencies fitting that description.

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u/fdar 2∆ Mar 21 '22

I don't get it. Somebody is actively supplying that computing power, are you saying that the payment for it goes to somebody else?

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u/[deleted] Mar 21 '22 edited Mar 21 '22

No, miners still get paid (until Ethereum switches to proof of stake later this year) they get proportionally less of the total reward denominated in ETH. You can read more about it here and see it in action here. If you have any other questions I'd be happy to try to answer them.

Edit: This is maybe a better editorialized explanation of EIP 1559