How Bitcoin gave me a better understanding of how our economy works
No, market capitalization is not what you think.
Remember: The only thing that gives anything any monetary value is the combination of limited supply paired with at least some demand for it. If either supply is unlimited or demand is non-existent there is no monetary value.
Even though this seems pretty self-evident the consequences are sometimes not as intuitive. For example, most people falsely believe that owning stock in a company has some intrinsic value. This could be said for some stocks that grant a dividend or voting rights. But some of the most successful stocks grant neither. For example, Alphabet has never granted any dividend for their stocks. Alphabet has two stocks listed on Nasdaq under the ticker symbols GOOG and GOOGL. GOOGL grants voting rights while GOOG doesn’t but they both usually trade within 1%. So neither dividends nor voting rights account for a big increase in demand to buy a stock.
So where does the demand for GOOG come from? For you as a shareholder, what do you get for buying GOOG stock if you get neither dividends nor voting rights?
The answer is: Nothing.
You get a part of something that people desire (demand) and that has limited supply. That’s it. No additional value. Why do people desire it? Because people who buy GOOG stock think that there will be even bigger desire in the future.
If there‘s no need for something to have an intrinsic value to be valuable this should also help our intuition for what market capitalization is. At first sight, market capitalization could be seen as the worth of the company as a whole. So you could think that Apple (current market capitalization at 2.2 trillion USD) is worth about 44 million premium sedans at 50’000 USD each.
This is not an honest comparison. Demand for cars is very tangible. People still need their cars to go to work. The demand for some stocks however is only tied to the belief that there will be even bigger desire in the future. If this belief is disturbed, there’s no reason why you would want to keep your asset. So market capitalization is an indicator of belief and should not be confused with worth.
So why is this important: My learning is that there’s no intrinsic value for many assets. The one and only reason for still buying them is the belief that people will believe more in them in the future. That doesn’t necessarily have to be a bad thing because it’s a system that has proven over time. But it’s something we should all be aware of.
