Stocks Split, a Problem Already Solved in Crypto
The recent split announcement by $NVDA, one of the most important companies on Wall Street, brings this concept back to the table. Let’s see what it is, why it happens, how it works, and how crypto has solved this issue from the start.
When a company performs a stock split, it is essentially a reduction in its trading price when it reaches very high levels.
If a stock rises significantly, it becomes increasingly expensive to buy a unit, leaving out retail investors. For example, NVDA currently trades around 1000 USD, meaning if you have 500 USD, you couldn’t invest in this company.
Through a split, in this case, 10-for-1, for every NVDA share an investor holds at the cut-off date, they will receive 10 shares, and correspondingly, the trading price will be reduced proportionally.
Holding 5 shares at a market value of 1000 USD = portfolio value of 5000 USD
After the split, we will have 50 shares at a trading price of 100 USD = portfolio value of 5000 USD
As we can see, the split does not affect our investment; on the contrary, it has several positive effects, which is why the market always celebrates these announcements with price increases before the cut-off date.
On one hand, retail investors who can now afford to buy shares will push the price up, and on the other, many less-informed investors see that the stock that used to trade at 1000 is now at 100 and rush to buy, believe it or not, this really happens!
There is also a psychological component that makes a stock with a lower price more attractive than one with a very high price, creating the perception that it’s more likely to go from 100 to 1000 than from 1000 to 10000.
Conversely, there is also the reverse split, which occurs when the trading price is very low, aiming to reduce the number of circulating shares.
Holding 500 shares at a market value of 1 USD = portfolio value of 500 USD
After the reverse split, 1-for-50 for example, we will have 10 shares at a trading price of 50 USD = holding value of 500 USD
The reasons for a reverse split include the risk of delisting if a stock’s price falls too low (below 1 USD), exclusion from options trading due to a low price, and increasing market attention.
So, a split is done by a company whose price keeps rising and a reverse split by one whose price has fallen significantly, making the former a positive signal and the latter not as much.
And are there splits in crypto? NO. It is unnecessary because crypto solved this problem from the start.
It would be logical to think that BTC needs a split since very few people could buy a unit at 70K. To solve this, BTC is divided into satoshis, meaning 1 BTC has 100 million sats, allowing investment in BTC with a very small amount like 1 dollar.
An interesting fact, for one sat to be worth 1 cent, BTC must trade at 1 million USD!
This also applies to other cryptocurrencies, making them accessible to anyone who wants to own a part of one.
As we can see, crypto has democratized the possibility of investing, solving a problem in advance without relying on a protocol to announce a price reduction to invest in it.
