Top lawyers of academia are not immune to misinformation.
This week’s Misinformation Monday award is going to… Thomas Lys, Eric L. Kohler Chair in Accounting and Professor of Accounting Information and Management and Professor of Law (by courtesy) at the Northwestern School of Law.
As expected, Lys has the resume. Econ undergrad at Bern. Master and PhD from Rochester. Well-published. Editorial board positions. Teaching awards. Big-name consulting. He’s done it all.
And yet, the LinkedIn piece he published on Bitcoin misses the mark on several fronts. This is the kind of misinformation that pains us to write. He’s not only intelligent and accomplished–we also trust that he genuinely cares about his audience. If Lys can’t fully connect the dots, who will?
So, what’s our issue?
Lys opens strong. His post is brief, to-the-point and friendly–an accessible primer on intrinsic value. Unlike someone like Pompliano, who claims intrinsic value doesn’t even exist, Lys correctly states that:
intrinsic value does exist;
it’s defined as the present value of expected future cash flows; and
selling the asset itself isn’t considered cash flow.
All of this is Finance 101. We shouldn’t be debating it. Judging from his follow-up post, Lys is baffled by the pushback–and we sympathize.
After laying out his case so eloquently, Lys arrives at the correct, natural conclusion: Bitcoin has no intrinsic value. That part of his message is solid. The issue lies in some of the commentary he sprinkles in along the way. Let’s unpack that, from the least troubling to the most consequential–especially in the context of our financial literacy goals.
📉 Dividends
Lys writes:
The asset can be an equity security, for example Apple stock where the expected cash flows represent expected future dividends…
This misunderstanding pops up often, even among economists. Chances are, we’ve perhaps slipped on this at some point too. If so, apologies for the sloppiness.
But let’s be clear: When you own stock, you own part of the company. The cash flows the company produces are the cash flows the company produces. Dividends are just one method of accessing those cash flows.
A company can generate substantial cash flows and choose not to pay dividends, or pay dividends despite struggling with cash flow. Valuing a company solely on dividends misses the point. It’s the total cash flow to the company that matters, because, as the owner of the company, those are your cash flows, too.
To illustrate: Would you rather own a safe containing $100 million that won’t unlock for 20 years, or an ATM that dispenses $1 every quarter for the next 20 years? A dividend-based valuation might argue for the ATM. Common sense, and actual value, points to the safe.
We intend to dig deeper into the historical roots of this confusion. Likely culprits: i) more companies paid dividends in earlier decades; and ii) many were mature firms with predictable profits–like utilities. In those cases, dividends mirrored actual cash flows.
Equating cash flows to dividends isn’t exactly harmless. It’s a foundational misunderstanding. But in the context of crypto, it’s a warm-up act compared to what comes next.
🫧 Bubbles
Let’s be fair, Lys doesn’t directly call Bitcoin a bubble. But we wouldn’t fault you for reading it that way. He writes:
Economists refer to the situation when asset prices [diverge] significantly from their intrinsic values as “bubble”...
This isn’t wrong but here’s a nuance that might sound picky–it’s actually pretty important.
We’ve defined a bubble narrowly and intentionally so:
A bubble is the significant overpricing of a cash-flow-generating asset relative to its intrinsic value.
Lys’s definition is similar, but broader. Our version draws a crucial line: We believe the term “bubble” should be reserved for assets that produce cash flows. Applying it to something like Bitcoin accidentally implies it’s a financial asset with intrinsic value–when it isn’t.
🎭 Ponzi
Lys writes:
Frankly, Bitcoins have characteristics of a Ponzi Scheme, and its valuation can be colloquially termed as “the last fool’s value” and is therefore extremely speculative.
This view isn’t new either. Dimon. Roubini. Taleb. Giants in finance, first names not required.
But we disagree. If we care about academic precision (and we do), it’s essential to separate Ponzi schemes from the Greater Fool Theory. The dividing line? Intent to defraud–which, to be fair, may be nearly impossible to assess from the outside in some cases.
Case in point: Adrian Pleterski, self-proclaimed “Crypto King.” A Gizmodo article lays out this very dilemma:
The question remains whether Pleterski actually invested any of the money in crypto to begin with, and speaks to just how strange the crypto market has been over the past year. For all anyone knows, Pleterski may have actually invested the money and lost it like so many others since the peak of November 2021. Bitcoin is down 56% since its price a year ago, while ethereum is down 57%. Pleterski insists he invested the money but that he’s just bad with record-keeping.
But some investors suspect Pleterski didn’t even bother investing the money, instead pocketing it for himself, according to people who spoke with the CBC.
“I don’t know if he was ever really trading,” Diane Moore, a woman who invested $60,000 with Pleterski, told the CBC. “Or was this his plan and it was just the story to get me in along with other people?”
If Pleterski was trading crypto, this is simply the Greater Fool Theory in action–a speculator chasing exit liquidity. Bad judgment, maybe. Fraud, not necessarily.
But if he never intended to trade, and merely robbed Peter to pay Paul? That’s a Ponzi scheme.
The excerpt above is helpful for illustrating this distinction. Unfortunately, it also mirrors the same error that Lys is making…
💰Investing
Now, for the most painful misstep. Lys writes:
So, did I ever invest in crypto? No, I never did and never will. I have always followed the principle of only investing in assets that make economic sense, it has served me (extremely) well.
Here’s how that should have read:
“So, did I ever invest in crypto? No, because one can never invest in crypto. Investing requires an asset that produces cash flows. Crypto doesn’t, so there is no such thing as investing in it. You can choose to speculate on it, if you want. I have always followed the principle of investing in assets, not speculating on them.”
See the difference?
By using the term “investing,” Lys concedes the crypto community’s biggest rhetorical victory–without even realizing it. And he’s far from the only one. Warren. Lagarde & Yellen. Even Damodaran. All made the same slip.
Thomas, we noticed you co-teach a law class. Narrowing the definition of “investing” not only shakes things up in finance but it also shifts the legal conclusions dramatically. If you’d like to chat further, our door is open.
🧠The Bottom line
If we want to make real progress on financial literacy, we must be relentless about defining ‘investing' with precision and maintain consensus. It’s a core goal of this blog–and it’s one we won’t abandon. We may be among the last still holding the line. But we’ll keep holding it.
