Stock split is a tool that companies use to increase the total number of shares in a company. This increases the liquidity of the security by increasing its availability. Stock splits do not fundamentally change the valuation of a stock. The market capitalization remains the same, but the price of each share will reflect the change in volume.
For example, if a stock split occurred and the number of shares doubled, the price of each stock would be half since there is twice the number of shares reflecting the same valuation.
Shares are distributed to shareholders based on the number of shares they currently hold in the stock split report.
Stock splits occur primarily to increase the liquidity of shares and make them cheaper 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 shares more attractive to investors. Investors are generally more willing to invest in 100 stocks with a valuation of $10 than 1 stock with a valuation of $1,000.
Now that our stock split basics are covered, let’s explore what a stock split would look like in the case of bitcoin.
What would a stock split for BTC look like
There are two scenarios to explore for bitcoin. The first is whether bitcoin were to change its total number of coins. The second scenario is if the number of units in a single bitcoin has changed. Let’s explore each scenario in detail.
No more than 21 million Bitcoins
One of the fundamental pillars on which Bitcoin is based is the principle of absolute scarcity. If the number of bitcoins in existence were ever to change, it would be devastating to BTC’s valuation proposal – that its supply reliably never changes.
The belief in the value of Bitcoin stems from reading that it has a fixed supply of 21 million. This is encoded in every miner and node that operates the bitcoin blockchain. Therefore, the concept of stock splitting, in theory, would not change Bitcoin’s market capitalization, but in doing so, it would undermine precisely what 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 multiple units. Here’s why the second scenario seems more plausible:
Multiple units in one Bitcoin
A good case can be made to divide bitcoins 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 10,000-fold increase in units). Nothing changes about the price of 1 BTC, but there is a perceptual difference in the number of units someone owns.
In tandem with allowing greater divisibility in bitcoin, other factors could be introduced to make bitcoin a more attractive investment. For example, instead of having BTC (~$16k each) as the base unit for buying on platforms, exchanges might decide to sell satoshi (~$0.00016 each).
The latter gives the impression that someone is getting a lot more bang for their dollar, although there is no difference in what they are buying. The industry needs look no further than the unitary bias shown in the monolithic rise of Shiba Inu (SHIB). It may be in the best interest of bitcoin proponents to support this change to crush the unitary bias experienced by newcomers to bitcoin.
It is important to note that this would not change anything about Bitcoin’s fundamentals and would only make it appear cheaper to uninitiated users.
What would a stock split look like for ETH?
Compared to BTC, ETH is much more malleable. It does not have a fixed offer to which it is linked or from which it gains value. While ETH’s valuation is determined by its market capitalization and the amount of ETH in circulation, it has the ability to introduce new coins and burn existing ones. This gives ETH unlimited supply and a way to reduce it when desired to match growth and maintain a stable price on its gas tariffs.
The Ethereum London Hard Fork in August 2021 actually engaged in what is referred to as a reverse stock split. This is the opposite of what happens in a stock split. Instead of introducing new coins or shares into the offering, they are taken out of circulation. In addition, the London Hard Fork introduced EIP-1559 which reformed the transaction fee market and the way gas refunds were handled.
High fees for ETH gas
The introduction of a share split in ETH could create a new dynamic and substantially increase its usefulness. Gas tariffs have been a persistent problem for ETH throughout its history and what has helped lead to a transition to a proof-of-stake consensus mechanism.
The more people use the Ethereum network and try to send transactions, the higher the fees will be. The more L2 and dApp blockchains are developed on the Ethereum blockchain, the greater the volume of transactions that will need to be processed. The proof-of-stake merger contained nothing to directly address the high gas tariffs.
A stock split and the introduction of more coins into the system will not affect the volume of transactions, but could help reduce gas fees by reducing the overall price of each ETH. If this is successful, stock splits on ETH could be an effective tool. Similarly, if the volume of transactions decreases or the price of ETH becomes too low, a reverse stock split could be implemented.
Of course unit distortion is less of an issue on ETH because it is much cheaper than BTC on a unit basis.
Taking a cue from traditional finance
The concept of introducing stock splitting in cryptocurrencies shows how different each individual project is from each other. For example, in a project, it could help adapt to the long-term stability of a crypto, such as ETH, increasing the liquidity of the project. 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 consider, and just because a stock split may be right for a project, it raises questions about who is ultimately responsible for its implementation, who gains the most, and whether it could be abused.