On December 3, 2020, we launched another major installment of the Nexonomics series: our $12M NEXO Token buyback program.
As we unveiled the details of this latest release, a few Nexonians asked for additional information on our buyback program, and on the purpose and mechanism of repurchases in general. So to make sure NEXO Token holders are all on the same page, we would like to use the opportunity to shed additional light on this process inspired by traditional finance and embraced by its digital counterpart.
What is a buyback?
A buyback, also known as a repurchase, is a mechanism whereby a company uses cash resources to re-acquire a portion of its own shares, or in the case of crypto – tokens, thus reducing the volume of shares/ tokens outstanding on the open market.
As part of a buyback program, a company pays its investors the market price per share or offers a premium to the current market price to repurchase a portion of its shares/ tokens, which was distributed among external shareholders/ token holders up until then.
Typically, buyback programs take months or even years to complete and are executed at different prices over time. To take an example, in March 2020 Japanese conglomerate SoftBank unveiled a plan for a 2.5 trillion yen ($23 billion) buyback and forecasted that it would take about four quarters to execute the repurchase.
What happens to the reacquired shares? The previously outstanding shares are not automatically eliminated. Instead, companies can choose to either cancel and permanently retire them OR continue to hold them in their treasuries for a later reissue. Treasury shares have no voting rights and are recorded on the balance sheet. In crypto-specific terminology, retiring repurchased tokens is usually referred to as a buyback and burn, because tokens get removed from circulation forever. Burning guarantees that those particular shares are never re-issued.
Why do companies carry out buybacks?
Buyback use cases vary and depend on a number of factors, including macroeconomic indicators, how mature and financially healthy a company is, and what the investment opportunities available are, among others.
Although the economic consequences of the COVID-19 pandemic may have caused many companies to freeze their share repurchases, buybacks are generally a conventional means – like dividends – to reward investors. A key difference between a buyback and a dividend is that the former does not guarantee what the future return will be, while the latter promises a definite, fixed gain. NEXO Token holders are now offered both.
- A company may opt for a buyback when it is bullish on its stock and feels that its shares are trading at a price below their value. Big corporations are no strangers to regular buyback programs and investors like them, because they see an immediate effect: the pulling of shares out of the open market results in a price boost as the value of the repurchased stock gets distributed among fewer shareholders. Share repurchases are great news for investors, too, because they lift stock prices by limiting the supply of shares available for sale. It’s supply and demand in action. To use our earlier example, SoftBank’s buyback helped the company’s share price reach two-decade highs.
- In addition to sweetening investors’ positions, buybacks tend to improve some valuation ratios for the remaining shares on the market. Therefore, companies sometimes carry out buybacks as a hasty remedy for their financial statements, boosting their earnings per share (EPS). A related interpretation, however, states that a buyback is a sign that the company is financially stable and thus no longer in need of additional equity funding.
- Yet another motive for a share repurchase could be an enterprise planning to compensate its staff and management with stock. It would then buy back some shares rather than issue new ones – an issuance would dilute the ownership of existing investors.
- Just as important as the above-mentioned reasons is the fact that executing a buyback increases a stock’s liquidity and by default lowers price volatility. As with other new industries, crypto markets are volatile, meaning that investor confidence in digital assets is not as widespread as with traditional stock. Buybacks within the crypto space can thus be used to bring liquidity to an asset and appease anxious investors with the ensuing price stability. They are usually an indicator that the issuer has extra cash on hand and that it has decided to reinvest some of it in itself.
Why is Nexo doing a buyback?
Although, as demonstrated by the recent price surge, the market is finally acknowledging our native token’s potential, the Nexo Team believes that NEXO is still heavily undervalued and trading at a discount. Our $12-million buyback program seeks to rectify this as part of Nexonomics – a comprehensive series of new features and upgrades designed to drive the NEXO Token’s tokenomics, reinforce its utility, and boost its value in the digital economy.
True to Nexonomics’ mission, the buyback program seeks to increase the growth potential and stability of the NEXO Token by boosting its liquidity, reducing price volatility, and contributing to price appreciation. This ultimately gives our token holders additional security that the NEXO Token’s value will continue to rise, thus encouraging them to HODL. At our end, this will further ensure the sustainability of the Nexo ecosystem as an extension of our self-sufficient business model.
The results of our tokenomics overhaul confirm not only our belief in the NEXO Token’s inherent value and prospects but also its desirability: since the start of Nexonomics on October 27, the price of our native token has increased by a whopping 173% to 0.44 apiece as of December 7 and over 60% of our clients chose to earn interest in NEXO Tokens. With the buyback program guaranteeing the supply remains limited, we are laying the groundwork for an even more desirable NEXO Token, with an even stronger token economy.
What will happen to repurchased NEXO Tokens?
Like with stocks, repurchased tokens are either canceled (burnt) or kept for future applications. The NEXO Tokens, which Nexo will repurchase as part of the buyback program, will be placed in an Investor Protection Reserve (IPR), visible at this ERC-20 address, for transparency.
As you know, Nexo distributes 30% of its net profits to token holders through dividends at least once per year. Tokens locked into the IPR will not be eligible for dividends, making the program all the more beneficial to loyal NEXO Token holders during future dividend distributions.
Each buyback will vest for a minimum of 12 months after the repurchase. Once vested, repurchased tokens may be re-locked or withdrawn and used for interest and cashback payments, liquidity provision on decentralized exchanges, and dividend distributions.
Additional budgets may be allocated for future repurchases in accordance with company growth and market conditions.
We firmly believe that the vast financial world should be accessible to everyone and hope that this explainer will be of use to you.