In the world of crypto when a token offers dividends it makes us feel a tad more excited. Profit share reminds us of the safety of stocks. However, although essential for stocks this option is often not effective for tokens.
Dividends are not always a good thing
Before we delve into the details it is important to understand what makes ICOs more attractive than issuing stocks. Initial Public Offerings the stock equivalent of an ICO are very expensive. When a company wants to go public they need to undergo a lot of investigation by tax and finance authorities.
Think huge fees and commissions.
An IPO costs at least 1 million US dollars with most well above the 5 million mark, check out this report by PwC for more details. This makes IPOs only feasible for large corporations. Small and medium sized businesses cannot afford going public in any way.
This is where ICOs shined. They are extremely cheap compared to IPOs which makes them ideal for smaller enterprises and start-ups
This is where the dividends’ problem steps in. Most financial regulatory bodies like the IFRS consider all tokens that have dividends a security. Meaning that the company issuing them has to abide to a lot of rules and regulation. Usually, more regulation means higher expenses.
Undergoing certification and licensing makes sense only for financial intermediaries like online exchanges. For projects oriented on developing a product or service it does not.
Why buybacks are better
A buyback is the company spending a portion of their profits to buy their own tokens. The aim of this is to bring up the price of the token or stabilize it in a moment of downturn.
A repurchase reduces the supply of tokens. So, the same value (market cap) is divided among less tokens. All other things held constant aka no bad news, the price of one token should increase.
A bit of cost-benefit analysis about buybacks..
Case 1: Pay out dividends.
Each contributor will receive a small portion of the company’s profits for each token they hold.
Case 2: Do a buyback
The total amount of tokens decreases, so the price increases. The benefit for the contributor is a higher price for each of the tokens he holds.
When the issue is framed this way both things are the same. You get a slight increase in the return of each token.
But remember the higher costs associated with security tokens.
Think that in Case 1 each year the company has to spend money on external audit and creation of detailed financial reports. The buyback company does not have these costs.
If then both companies have the same profit, since the buyback company has less expenses, they will have more profit available to give out to contributors.
Buybacks: Wrapping it all up
Finance is not an exact science. Choosing the right benefits of a token is not an easy job. Yet, the most important consideration is always cost effectiveness. Each dollar spent has to serve a purpose.
For financial intermediaries paying out dividends makes sense since either way they have to undergo external audit.
If a company’s core business does not require for them to undergo financial supervision doing a buyback is better than paying dividends.
Here are some examples of ICOs who have a buyback policy.
Iconomi allows people to more easily manage their portfolios and exchange information
LH-crypto is aiming to be the first crypto brokerage solution that offers margin trading and leverage
AgroTechFarm’s product is an appliance for growing organic vegetables,fruits and cannabis at home
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