Token buybacks are poison? The real issue the crypto industry needs to address is the lack of equity.

Writing by: fejau

Translation: AididiaoJP, Foresight News

The crypto industry has been struggling to build in the face of unclear regulatory minefields, but now finally has the opportunity to stabilize after experiencing SEC’s restrictive regulation. Regulatory uncertainty has forced many projects to adopt unconventional capital structures.

Due to the lack of clear guidance, is a token considered a security? If so, how should it be registered? Many organizations have had to find alternative solutions. Uniswap is an early example: they had to build a “firewall” between the equity-holding laboratory entity and the foundation managing governance tokens. Frankly, that governance token is essentially useless, as the SEC has never clarified how to compliantly structure a blockchain token entity.

Now, the CLARITY Act is about to pass, promising to provide definitive legal guidance for the compliance path of crypto tokens. Perhaps the industry can finally “grow up.”

I do not mean to dismiss projects that have been forced to split equity and tokens. Under Gary Gensler’s aggressive litigation, they had no choice and no compliant pathway to follow.

This situation has led to a surge of “only falling, no rising” altcoins. These tokens lack equity attributes but have become tools in the crypto venture capital industry to “market cap” illiquid assets. When these so-called “fundamental” tokens perform poorly, meme coins and Pumpfun become the only “fair” games in the market.

At least you know: these things you trade originally have no value.

But now, the situation is changing. The segmentation of the cryptocurrency market is accelerating: 90% of tokens continue to decline, while the remaining 10% have solid buy support.

These 10% tokens are able to stand firm mainly because of two reasons: first, their token supply structure is healthy (without heavy selling pressure from VCs or investors); second, most of them come from genuinely profitable projects. This is an astonishing shift for the entire industry. People are slowly accepting the fact that “crypto projects can actually make money.”

These 10% “revenue-generating tokens” are at the critical forefront of whether the industry can mature. But as companies start generating revenue, cash flow analysis becomes feasible, and how to handle profits has become a hot topic. So, we’ve come full circle back to the world of corporate finance and capital structure decisions. Many are caught off guard, as not everyone has taken a corporate finance course seriously.

Hyperliquid is a catalyst for the “revenue-generating token” trend. They have begun to repurchase tokens programmatically, regardless of price, and are investing 100% of exchange revenue back into buybacks.

In crypto, buybacks are often simply understood as “reducing supply to push up the price.” While that’s true, it overlooks a deeper issue: how much revenue should a company allocate for buybacks?

To understand this, it’s helpful to view buybacks as a form of “dividends.” Mechanically, buybacks have always been a more tax-efficient form of dividend.

In traditional finance, profit distribution decisions are usually based on:

A company earns annual net profit, part of which is paid out as dividends, and the rest becomes “retained earnings” on the balance sheet.

From retained earnings, the company can choose to: repay debt, pay maintenance capital expenditures, reinvest in internal growth, or buy back its own stock.

In recent years, large companies prefer buybacks because they are essentially a more tax-efficient dividend. Buybacks can boost earnings per share, theoretically raising the stock price as well, similar to dividends, but shareholders do not have to pay taxes immediately.

If a company’s return on invested capital (ROIC) exceeds its weighted average cost of capital (WACC), reinvesting profits for growth is more prudent. Conversely, if internal investments have negative net present value, returning money to shareholders makes more sense.

For mature companies lacking high-return investment opportunities, returning cash via dividends or buybacks is more appropriate.

Thus, buybacks are essentially an “upgraded dividend.”

So, ask yourself: which early-growth company in history would have made “using most of its income (not even profit!) for dividends” its core strategy?

Of course, none—this is fundamentally unreasonable.

The core reason is that: equity holders typically believe that reinvesting profits yields higher returns than paying dividends and seeking new investments. If you hold a company’s equity, you are likely optimistic about its growth potential; otherwise, why invest?

Therefore, setting a high, automated buyback ratio without discretion is unreasonable.

The buyback ratio should be a tailored decision based on:

• The balance between ROIC and WACC

• The company’s stage of development

• Current market valuation

For very early-stage companies (99.9% of crypto projects fall into this category), a reasonable buyback ratio should be close to zero. As an equity holder in these companies, your role is to trust the founders and let them focus on building.

This issue is less prominent in traditional finance because of clear equity rights: shareholders have explicit legal claims to residual value and ongoing cash flows.

The problem in the crypto industry is precisely that most tokens lack strong equity attributes.

In this rights vacuum, frantic investors and project teams alike grasp at “buybacks” because it at least provides a semblance of equity rights. But this is a very crude and inefficient approach that can stifle the company’s growth potential.

If we could establish clear token equity rights, investors would be confident in letting founders build and reinvest profits, knowing they have legitimate rights to the company’s ultimate value. Currently, everyone is desperately clinging to buybacks because it seems to be the only tangible option.

Resolving the rights issue is essential for the industry to truly mature.

Because of this, combined with the positive momentum I see now, I am very optimistic about the future of the crypto industry.