The author is a collaborating editor of FT
BTCS, a state-owned 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 bitcoin.
It’s a small company, which was only elevated to the Nasdaq last year. You might think of the bividend as a bit of a neat investor relations stunt with a Twitter-friendly brand name. It’s a possibility that BTCS CEO Charles Allen happily acknowledges. He wanted people to see the value of the business and read its materials. Success!
Behind the dividend hides a bet which, if correct, could have far greater consequences. Allen offers to pay bitcoin investors in part because BTCS has 90 bitcoins on its balance sheet which have value, but no productive targets. Bitcoin, according to Allen, is an unproductive asset, “just literally sitting there”. It might appreciate. But that doesn’t generate income, which has always been the goal of a publicly traded company.
BTCS was founded as a pure cryptocurrency company in what now looks like the Precambrian era in 2013. It started out in e-commerce, selling products for bitcoin. He switched to bitcoin mining, suffered what Allen calls a “crypto winter,” then spent time buying bitcoin and ethereum, thinking about what to do next. According to its latest quarterly filing, the company now owns two types of cryptocurrency, which appear in different parts of its balance sheet.
In addition to dollar cash and prepaid expenses, the company holds $ 3.2 million in “digital assets / currencies”. These are the 90 bitcoins, sitting in the cash, doing. . . nothing. The company also has $ 8.8 million in “staked digital assets / currencies” at the heart of its new strategy. The currencies involved are mainly 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 began staking – putting Ethereum and a few other cryptocurrencies in some sort of digital escrow, vying for a chance to verify a transaction ledger. The more coins you put in, the more likely you are to check the ledger. The reward is a fee for more coins. The company also maintains validator nodes – staking pools that will bring other people’s parts off of its balance sheet.
The bitcoin protocol is not designed for staking. Bitcoin, by design, meant to stay there, hopefully becoming more valuable, transferable if needed. It’s good if you own bitcoin and are optimistic about its future. It’s bad, however, if you are a publicly traded company trying to figure out how to generate income. The bet on bitcoin in particular has always been that the more people hold it, the more useful it will become. There is, however, a difference between “keeping” and “useful”.
The dividend is not, strictly speaking, a dividend – a profit, paid to shareholders. Rather, it is a return of capital. Ideal for shareholders, this makes the dividend tax exempt. It also feels a bit like a share buyback, a tacit admission that says here, you take this, because we have no plan on it. If BTCS is right, Bitcoin is heading into a strange twilight. It is not quite ready cash. It is not a productive asset either.
After the announcement of BTCS, Hanno Lustig, economist at the Stanford Graduate School of Business, underline that the company had a long tradition of distributing dividends in kind. In the 17th century, he writes, the Dutch West India Company paid dividends in cloves.
Other stock companies in the early modern era used the same model. The Royal African Company of England paid its dividend in gold coins which, over time, only became known as guineas, named after the African coast where the gold came from. The guineas were initially a dividend, and only became a unit of account with time. the joachimsthaler, the large silver coin that served as a model for taler and value coins around the Baltic – and eventually what became known in the United States as the Spanish dollar – was originally a dividend also paid to investors in Saxon stocks at a silver mine in Bohemia.
But that’s not quite what BTCS does. All these early modern stock companies paid their dividends in kind from their income. The Royal African Company exported gold from Africa – the gold itself was income. The West India Company exported cloves. The Saxon public limited companies exploited the money. BTCS’s income, however, comes in the form of ethereum, or whatever other coins on its balance sheet it can stake. In its current business, it does not earn bitcoin. According to Allen, the company could pay real dividends in ethereum in the future. But for now, it’s just a matter of paying a dividend – a return of capital in the form of bitcoin, an asset that has value, but has no use.
