Cryptocurrencies may generate dividend-like returns

Mads Eberhardt

Cryptocurrency Analyst

Summary:  It is typical to hear that cryptocurrencies do not generate value for the holders, except for a potential increase in the price of a given cryptocurrency. Yet, contrary to this popular belief, some cryptocurrencies may give additional returns similar to dividends or buyback programs of equities, although the fluctuations in cryptocurrencies are rather large right now compared to the dividend-like returns.


Cryptocurrencies are often criticized for not providing any financial benefits to their holders in contrast to holding equities, where holders benefit from dividends and buybacks to reduce outstanding shares by effecting a buyback program.

Not only do the majority of cryptocurrencies not provide financial benefits to holders, but they also often dilute the very same holders, as they issue new coins to miners and stakers to incentivize them to verify transactions. A regular holder of Bitcoin as well as other proof-of-work cryptocurrencies will be diluted over time. In terms of Bitcoin, 1.7% of the supply is presently issued annually to miners. For proof-of-stake frameworks such as Ethereum, regular holders are also diluted by a similar mechanism – unless the holders decide to stake their coins.

Ethereum provides staking rewards but does not dilute stakers

In proof-of-stake, to compensate stakers with rewards without simultaneously diluting them, transaction fees are absolutely crucial. In the past 30 days, Ethereum has generated $69.71mn from transaction fees, which are particularly burnt and paid to stakers. Since adopting a proof-of-stake framework on September 15th this year known as the Ethereum merge, Ether holders have been able to earn an annual reward of up to 7% by staking their Ether. The reward is derived from newly issued Ether and the unburnt transaction fees.

Although the network issues new Ether to stakers, since it also burns the majority of transaction fees, the supply has largely been constant since the Ethereum merge. So, the rewards to stakers have not come at the expense of dilution but rather due to transaction fees. It is important to notice that stakers lock up Ether for the foreseeable future and risk being slashed, meaning the network can ultimately take all their Ether in case the staker acts dishonestly. The latter occurs relatively rarely. Likewise, stakers have ongoing expenses to verify transactions, but they are estimated to be below 10% of the rewards. At present, around 15.6mn Ether are presently staked out of a total supply of 120mn.

Again, if you do not stake Ether, you will not receive a direct reward. Yet, the supply may turn negative, if burnt fees exceeds newly-issued Ether. This occurs in times of high demand for Ethereum-based transactions. If the high demand for transactions in 2021 is to be repeated in the future, we are likely to see an annual negative supply growth of up to 1%. This would benefit all holders of Ether, not just those who are staking it.

ENS has $43mn on its book

It is not only native blockchains to possibly generate yield. Here, we also find tokens, in other words, protocols based on, for instance, Ethereum. We stay within the ecosystem of the latter, namely Ethereum Name Service or ENS in short. ENS is the decentralized protocol for registering domain names on Ethereum. Like ordinary domain names, there is a small recurring cost to keep ownership of an ENS domain. Last month, ENS generated a revenue of $1.7mn, while its all-time high was in May of this year at nearly $10 million. Although the revenue is almost as volatile as crypto prices, it implies that protocols can generate revenue too.

Monthly revenue of ENS. Source: Dune.com

After paying expenses to further develop and market the protocol, the revenue of ENS is paid to the treasury of the DAO (decentralized autonomous organizations) of ENS. This is the treasury that the holders of the ENS token control, and they decide what to do with it. At present, ENS has over 35,000 Ether in its treasury, worth over $40 million. At a fully diluted market capitalization of the ENS token of $1.3 billion, having a treasury of over $40 million is relatively insignificant, but it shows that a DAO can generate revenue, have a treasury, and potentially compensate holders in the future. To compensate holders, a DAO may use its treasury to buy back and burn its native token to potentially increase the price of its token, as the decentralized stablecoin MakerDAO has done.

No certainty about dividend-like returns

It should not be a surprise for any that crypto prices are greatly volatile. So, as long as this is the case, the perception of dividend-like return is likely to be negligible to traditional investors. In our view, when your potential downside is as high as e.g., 90% on the asset itself, you do not appreciate the potential 4% you receive in annual staking rewards. To make matters worse, the staking reward is denominated in the respective cryptocurrency, so the real yield of staking is perfectly correlated to the asset, so if the asset tumbles by 50%, the staking reward does so as well. This is contrary to a traditional dividend paid in cash.

Not only are the prices volatile, but as stressed by both Ethereum and ENS, their respective revenues are highly volatile, effectively causing the potential reward to be volatile. One day, Ethereum may burn more Ether than it issues, but the next day it may burn much less than its issuance rate. As long as the use cases for cryptocurrencies are purely speculative, the volatility in prices nor revenues will decrease. This makes it difficult to predict and manage the potential value generated by these cryptocurrencies. The volatility, however, will first decrease sufficiently the day crypto is used in more genuine use cases. The latter may lead the broader market to recognize that cryptocurrencies can create a constant real yield. However, there is no guarantee that these use cases will ever emerge.

The examples mentioned herein are not endorsements of the individual projects, but rather show that, in our view, various cryptocurrencies may generate dividend-like returns, somewhat similar to equities.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.