3 reasons why crypto investors like buybacks
Buybacks, or share repurchases, take place when a company buys its own outstanding shares, therefore raising demand. Fewer shares on the market mean higher demand, therefore driving up the value of shares. In simple terms, it is a method of investing in your own company. Buybacks usually occur when a company has extra revenue and has not found any suitable investments to spend it on.
Although presented in terms of companies and shares, the same ideas can be altered to fit cryptocurrency companies and their tokens. Buybacks are great for crypto investors for three main reasons.
1. Buybacks signify a profitable cryptocurrency
Cryptocurrency buybacks usually occur when a company has extra revenue. Buybacks signify that a cryptocurrency is performing well enough that the company has instead decided to invest in itself. Companies will often repurchase their cryptocurrency when they believe it is undervalued. The buyback, in most cases, raises the value of the asset almost instantly. Once a company buys back its tokens they are either burned, meaning destroyed forever, or held onto for future uses.
2. Buybacks can be much more profitable than dividends
Dividends are quarterly or sometimes even daily payouts to a company’s investors. They function fine in terms of shares, but when dealing with cryptocurrencies, multiple questions can arise.
How will these dividends be disbursed? Cryptocurrencies are traded through cryptocurrency trading platforms, meaning an investor buys cryptocurrency through an exchange rather than directly from the company. So, in theory, dividends would have to be delivered through an exchange, which would most likely cost a fee. Also, the responsibility of dispersing the funds would rely on the operators of the cryptocurrency exchange platform themselves.
Another problem associated with dividends is that financial regulatory commissions, such as the International Financial Reporting Standards (IFRS), consider all tokens that pay out dividends as a security. This brings more regulations and fees as well as increased taxes for investors. Buybacks are simply a company reinvesting in itself, therefore, no new regulations are placed upon them and the same tax rates still apply.
3. Buybacks increase the value of a cryptocurrency
When a company performs a buyback, they are reducing the number of cryptocurrencies on the market. The value of the assets repurchased by the company is then dispersed among any remaining tokens on the market and investors currently holding that company’s token. It’s simply supply and demand. When the supply drops, the demand increases thereby pushing a token’s value up.
A downside to buybacks is that it is a method sometimes used by companies to artificially raise the value of their tokens. Companies may be borrowing money for buybacks rather than using profit from the previous quarter. If a buyback is genuinely conducted with excess funds, then it can be profitable for long-term investors. If, however, they are borrowing money for buybacks, it is more profitable for short-term investors who plan on selling the shares after the value has gone up.
Buybacks are a benefit
Genuine buybacks are beneficial to both investors as well as the companies performing them. They signal profit and increase value. Although they may be used negatively by some companies, this is a rare case and is more of an exception. If the value of a cryptocurrency you currently hold has increased due to a buyback, you may want to hold onto it as it is likely it will continue to increase into the future.