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Nexo will soon be holding a vote to determine if it will continue paying dividends to Nexo holders or begin paying interest on the Nexo token, like it does on other coins. This has prompted a lot of debate among Nexo holders about the wisdom of trading this dividend for the interest payments. Some are more than happy to do so because the rates of interest would seem to dwarf the projected dividend payment, while others are loathe to do so because they project the dividend to grow at previous rates and to eventually dwarf these interest payments. Some have even speculated that the vote is merely a cynical ploy by Nexo, as they would trick us into accepting lower payments and make us think we voted for it while our vote may be irrelevant due to Nexo's overwhelming voting share. The truth is, it shouldn't really matter to us if we receive interest, or a dividend, or nothing on our holdings, at least by traditional finance.
The Irrelevance of Dividends
In 1958, Franco Modiligani and Merton Miller--who would both go on to win Nobel prizes for their work in economics--proposed a theorem that is often referred to as the capital structure irrelevance theorem; this holds that, in an efficient market, a firm's value should be unaffected by its capital structure, including the issuance of a dividend, leading us to the the Dividend Irrrelevance Theory:
"The theory states that firms that pay more in dividends will have less price appreciation, resulting in the same total return to shareholders regardless of dividend payout."
https://www.etftrends.com/model-portfolio-channel/dividends-traditional-vs-behavioral-finance/
So, in an efficient market, if Nexo's pays out a certain part of its capital in dividends or interest, its value should go down by a similar amount. If it makes money and pays no dividend, its value should go up. Furthermore, one could effectively replicate the dividend--or determine the dividend rate of their choosing--simply by selling a percentage of their holdings. Conversely, one could effectively forego the dividend by reinvesting in more tokens. While the price and amount of tokens would change, the overall value should remain the same. It's like moving money from one pocket to another.
Now, crypto isn't necessarily an efficient market, and a lot of the assumptions of that theorem may be even less applicable in crypto than they are to the market:
"While the Modigliani-Miller Model has several assumptions that don’t necessarily hold up in a real-world setting (no taxes or trading costs, to name two), the creakiest assumption is that investors are indifferent between dividends and price appreciation."
https://www.etftrends.com/model-portfolio-channel/dividends-traditional-vs-behavioral-finance/
Assumptions and Crypto
There are several assumptions this relies on they may not be applicable. Firstly, there are clearly transaction costs like commissions and transfer & withdrawal fees that may make selling to replicate a dividend a bad idea. Another thing to consider would be taxes. Receiving a dividend may trigger a taxable event, while simple price appreciation would not. This could subject effectively the same money to a short-term capital gains tax (in the case of dividends) or income tax (in the case of interest) at a higher rate and sooner than the long-term capital gains tax. This loss could add up with compounding.
Note: Some of you in the US may have purchased Nexo on Changelly and be thinking about selling it there, paying an enormous spread / fee. Please don't. Swap Nexo for BNB on Trustwallet. From there you can send it back and swap to whatever you'd like on the Nexo exchange or send it to whatever exchange with little fee.
From Wikipedia:
"The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed"
Efficient market theory has been strongly tested in the market and seems even less applicable to crypto. While blockchain technology may be decentralized and give symmetric information in the sense that it has open records of all transactions, in a world where an Elon Musk tweet or government announcement can rock the market, I wouldn't assume asymmetric information either.
https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem
Behavior Finance vs. Traditional Finance
One of the biggest things the theory neglects--or rather a difference in traditional versus behavioral finance--is that people simply seem to prefer to receive dividends:
"While this preference is undeniable, the impact of dividends on company valuation represents a fault line between a traditional finance view and a behavioral finance view of markets:
- From a traditional finance standpoint—where all investors are rational and markets efficient—the relevance of dividends on firm valuation can be tenuous because investors should be indifferent between dividends and capital gains.
- A behavioral finance perspective gives license to the impact of dividends on firm value because investors may prefer firms that pay dividends, assigning value to a steady payout and thus increasing the value of these companies."
https://www.etftrends.com/model-portfolio-channel/dividends-traditional-vs-behavioral-finance/
That preference in itself could have an effect on investor demand. If people prefer dividends and prefer a token that pays dividends, their removal could lead to a fall in Nexo's price. People selling to replicate the dividend could also create more selling pressure on the token, driving the price down by the law of supply in demand if sold in sufficient numbers, and potentially leading some to lose out, selling at lower prices.
Dividends and Growing Companies
Nexo is a growth company and growth companies usually prefer to invest in themselves to fuel further growth rather than pay dividends:
"Most companies that pay dividends tend to be better-established companies with large market shares and minimal opportunities for substantial growth. Growth companies, on the other hand, are usually newer and trying to seize market share. They have ample growth opportunities and reinvest all of their profits to try to continue growing at a rapid rate. Think Microsoft (dividend) vs Tesla (growth)."
https://richbitchfinance.com/2020/08/14/dividend-stocks-vs-growth-stocks-which-should-you-buy/#:~:text=A%20dividend%20is%20a%20percentage%20of%20a%20company%E2%80%99s,usually%20newer%20and%20trying%20to%20seize%20market%20share.
Like many crypto platforms, Nexo would certainly do well to invest in their customer service and IT departments. Many of us have seen rare occurrences of absurdly long waiting times on deposits. I'm avoiding depositing ETH or BTC there because of it. Rather than potentially lose customers and capital because of such problems (by paying a dividend or interest instead of investing in the company), they would probably be better served to invest in the company. Of course that depends on their situation and the opportunities available.
Dividends vs. Interest Payments
As for dividends or interest payments, the long-term investor should be indifferent, at least if they'd receive the relevant payments in Nexo (non-US users), absent any tax implications. If they were to pay more in interest than the dividend, the market valuation would go down correspondingly. Conversely, if they pay less, it should go up. And remember: one could simply swap to BNB on TW and send it back for almost no fee.
Nexo has historically divided its dividend into a loyalty dividend based on how long the Nexo was held and a part based on quantity held at the date of the snap-shot. This mitigates the difference between periodic dividends and interest.
US Users: Now, it's unclear how this change could affect US users. Currently US users should receive the interest in Bitcoin, as they can't receive Nexo due to US securities laws (or earn the extra 2% bonus in Nexo). If the interest payments would also be paid in Bitcoin, this wouldn't seem to have an effect, except in the potential change in the price of bitcoin and effect of compounding in receiving it sooner.
If a US user plans to hold the bitcoin and assumes the price of Bitcoin will go up, he should prefer the dividend. If, however, US users would simply be unable to receive the Nexo dividend, then this would obviously be a very disadvantageous change and he should vote against the proposal. I don't believe that would be the case, but Nexo should probably clarify the effect on US users before the vote.
Non-US Users
If users receive Nexo for either payment, then their preference may depend on their projection for Nexo's price. If one projects Nexo's price to multiply (and not entirely based on the profit generated), than receiving the payments sooner and at cheaper prices would be a wiser decision
TL;DR
Due to a dividend or interest payment's corresponding decrease on capital, a long-term investor should be indifferent to whether they receive a dividend, interest payments, or anything at all. Nexo needs to clarify the potential effect of the change on US users. If US users are bullish on bitcoin and would receive dividends in bitcoin, they should probably vote for the dividend. If they receive Nexo, they should be indifferent, and if they receive nothing, they should vote against it.
Non-US users need to consider the local tax implications as well as their transaction costs. It should be noted that while the Nexo exchange doesn't charge a fee, there can be a significant spread.
Nexo experimenting with governance and giving us some choice in the matter is a good thing. They are a growing company and need to invest in growing their business and maintaining a sustainable business model. To the extent that paying periodic interest rather than a dividend stabilizes their cash flow--predictability is very important in the risk-return tradeoff--as well as lessons volatility and selling pressure in the token (from those selling after the dividend), changing to interest would be good for the business and good for Nexo.
As Nexo holders--"Nexonians" if you will (I'd rather not)--what's good for Nexo's business is good for us. Consider these things and vote as you think best, but remember that the outcome will not affect the long-term holder very much.
