The writer is a contributing editor for FT.
BTCS, a public crypto company, this week offered its investors what it called a “bividend” – a one-time payment of five cents per share, payable in dollars or bitcoins.
It is a small company, which only got listed on the Nasdaq last year. You might view the bividend as a gimmick, a crafty investor relationship with a Twitter-friendly brand name. It’s a possibility that BTCS CEO Charles Allen happily acknowledges. I wanted people to see the value of the company and read its documents. Success!
Behind the bividend is a bet that, if successful, could have much greater consequences. Allen offers to pay investors in bitcoins in part because BTCS has 90 bitcoins on its balance sheet that have value, but no productive purpose. Bitcoin, according to Allen, is an unproductive asset, “literally sitting there.” I could thank. But it doesn’t generate income, which has historically been the purpose of a publicly traded company.
BTCS was founded as a pure cryptocurrency company in what now seems like the Precambrian era in 2013. It started in e-commerce, selling products for bitcoin. He switched to bitcoin mining, suffered what Allen calls a “crypto winter,” then spent some time buying bitcoin and ethereum, thinking about what to do next. According to its latest quarterly filing, the company now has two types of cryptocurrencies, found in different parts of its balance sheet.
Along with the dollar cash and prepaid expenses, the company has $ 3.2 million in “digital assets / currency.” These are the 90 bitcoins, sitting on the hoard, doing. . . any. The company also has $ 8.8 million in “staked digital assets / coins,” the core of its new strategy. The coins staked are mostly Ethereum. They have a job and generated $ 1.2 million in revenue last year (the number is unaudited, but is consistent with the company’s audited quarterly reports).
Again, these are small numbers. What matters is the distinction. Ethereum has a job. Bitcoin does not. BTCS has started gambling, placing ethereum and a few other cryptocurrencies in a kind of digital escrow, vying for the chance to verify a transaction ledger. The more coins you have wagered, the more likely you are to check the ledger. The reward is a fee of more coins. The company is also running so-called validation nodes – stake pools that will bring others’ coins off their balance sheet.
The bitcoin protocol is not designed for gambling. Bitcoin, by design, is supposed to just stay there, hopefully it becomes more valuable, transferable if necessary. This is good if you have bitcoin and are optimistic about its future. However, it is bad if you are a public company and trying to figure out how to generate income. The bet on bitcoin in particular has always been that the more people have it, the more useful it becomes. However, there is a difference between “retain” and “useful”.
The bividend is not, strictly speaking, a dividend – profit, paid to shareholders. Rather, it is a return of capital. Conveniently for shareholders, this makes the bividendum tax-free. He also does it a bit like a stock buyback, an unspoken confession that says here, take this, because we have no plans for that. If BTCS is right, bitcoin is heading towards a strange twilight. It is not cash. Nor is it a productive asset.
After BTCS made its announcement, Hanno Lustig, an economist at Stanford Graduate School of Business, he pointed that the company was part of a long tradition of distributing dividends in kind. In the 17th century, he wrote, the Dutch West India Company paid dividends in nails.
Other early modern corporations used the same model. The Royal African Company of England paid its dividend in gold coins that only eventually came to be known as guineas, named for the African coast where the gold came from. The guineas were first a dividend and only became a unit of account over time. The joachimsthaler, the large silver coin that served as a model for speaker Y daler currencies around the Baltic – and eventually what came to be known in the United States as the Spanish dollar – was originally a dividend, too, paid to investors of Saxon shares in a Bohemian silver mine.
But this is not exactly what BTCS is doing. All of these early modern corporations paid their dividends in kind with the proceeds. The Royal African Company exported gold from Africa; the gold itself was income. The West India Company exported cloves. Saxon joint-stock companies mined silver. BTCS income, however, comes in the form of ethereum, or the other currencies on your balance sheet that you can bet on. In your real business, you don’t earn bitcoins. According to Allen, the company may pay real dividends in ethereum in the future. But at the moment, it is simply a matter of paying a bividend: a return of capital in the form of bitcoin, an asset that has value but has no purpose.