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Would a “Stock Split” Benefit BTC or ETH? How Would it Even Work?
Stock splitting is a tool companies use to increase the total number of shares in a company. This boosts the stock’s liquidity by increasing its availability. Stock splits do not fundamentally change the valuation of a stock. The market cap remains the same, but each stock’s price will reflect the volume change.
For instance, if a split stock occurred and the number of stocks doubled, the price of each stock would be half since there is double the number of stocks reflecting the same valuation. The shares are distributed to shareholders based on the number of shares they currently hold at the ratio of the stock split.
Stock splits occur primarily to increase the liquidity of the stocks and make them more affordable without losing value. They typically signal that a company is healthy, as its valuation is usually high before the split.
In addition, by introducing a stock split, companies make their stocks more palatable for investors. Investors generally are more willing to invest in 100 stocks at a $10 valuation versus 1 stock at a $1,000 valuation.
Now that our bases on stock splitting are covered, let’s explore what a stock split would look like in the case of bitcoin.
What a Stock Split Would Look Like for BTC
There are two scenarios to explore for bitcoin. The first is if bitcoin were to change its total number of coins. The second scenario is if the number of units in a single bitcoin changed. Let’s explore each scenario in detail.
No More Than 21 Million Bitcoin
One of the fundamental pillars that Bitcoin is founded on is the principle of absolute scarcity. If the number of bitcoin in existence were to ever change, it would be devastating to the BTC’s valuation proposition – that its supply reliably never changes.
The belief in Bitcoin’s value arises from the reading that it has a fixed supply of 21 million. This is encoded in every miner and node that runs the bitcoin blockchain. Therefore, the concept of stock splitting, in theory, would not change Bitcoin’s market cap, but by doing so, it would undermine the very thing that we believe gives Bitcoin its value.
But a true stock split doesn’t really change the value of the underlying asset, it just divides the asset into more units. That’s why the second scenario seems more plausible:
More Units in a Bitcoin
A good case can be made to divide bitcoin into more than 100 million units. In this case, instead of 100 million units, each bitcoin could be divided into a billion units (10x increase), or a trillion units (a 10,000x increase in units). Nothing changes about the price of 1 BTC, but there is a perceptual difference in how many units someone owns.
In tandem with allowing more divisibility in bitcoin, other factors could be introduced to make bitcoin a more appealing investment. For example, instead of having BTC (~$16k each) be the base unit for purchase on platforms, exchanges could decide to sell satoshis (~$0.00016 each).
The latter gives off the impression that someone is getting much more bang for their buck, even though there is no difference in what they’re buying. The industry need not look any further than the unit bias displayed in the monolithic rise of Shiba Inu (SHIB). It may be in the best interest of bitcoin proponents to advocate for this shift to squash the unit bias experienced by newcomers to bitcoin.
It’s important to note that this wouldn’t change anything about the fundamentals of Bitcoin and would just make it appear cheaper to uninitiated users.
What a Stock Split Would Look Like for ETH?
Compared to BTC, ETH is much more malleable. It does not have a fixed supply that it is tied to or gains value from. While the valuation of ETH is determined by its market cap and the amount of ETH in circulation, it has the ability to introduce new coins and burn existing ones. This gives ETH an unlimited supply and a way to reduce it when desired to match growth and maintain a stable price on its gas fees.
The Ethereum London Hard Fork in August 2021 effectively engaged in what is referred to as a reverse stock split. This is the opposite of what happens in a stock split. Rather than new coins or stocks being introduced into the supply, they are taken out of circulation. In addition, the London Hard Fork introduced EIP-1559 which reformed the transaction fee market and how gas refunds were handled.
High ETH Gas fees
Introducing a stock split into ETH could create a new dynamic and substantially increase its utility. Gas fees have been a persistent issue for ETH throughout its history and what helped lead to a transition to a proof-of-stake consensus mechanism.
The more people using the Ethereum network and trying to send transactions, the higher the fees will be. The more L2 blockchains and dApps that are developed on the Ethereum blockchain, the higher the volume of transactions that will need to be processed. The Merge to proof-of-stake did not contain anything to address the high gas fees directly.
A stock split and introducing more coins into the system won’t impact the volume of transactions, but it could help reduce gas fees by reducing the overall price of each ETH. If this proves successful, stock splits on ETH could be an effective tool. Similarly, if the volume of transactions fell off or the price of ETH became too low, a reverse stock split could be implemented.
Of course unit bias is less of an issue on ETH because it’s far cheaper than BTC on a per unit basis.
Overview: Taking Cues from Traditional Finance
The concept of introducing a stock split to cryptocurrencies just goes to show how different each individual project is from one another. For example, in one project, it could help adjust to the long-term stability of a crypto, like ETH, by increasing the project’s liquidity. Whereas, in another project like BTC, if a stock split were ever to occur, it would almost certainly collapse the project itself.
There are more aspects to take into account, and just because a stock split may be right for one project, it raises questions about who is ultimately responsible for its implementation, who gains the most from it, and if it could be abused.
