- The price you pay for stock determines the future return because the price will suddenly begin to matter when valuation stops rising.
- Bubbles in history have shown that FOMO and greed can bring people to turn to leverage
Bitcoin is still at the top by market cap, but thousands of competing cryptocurrencies are fighting for dominance. For some, Bitcoin will always be the reigning champion. Others believe that it is an outdated technology and that there are many better options on the market now. This crypto debate will end with people losing money according to a MarketWatch analysis.
An overabundance of optimism
It is hard to estimate the value of crypto because it has no cash flow, but the price of cryptos today might show excess of easy money and optimism. The same might go double for NFTs (nonfungible tokens), with bored ape NFTs selling for hundreds of thousands. MarketWatch describes NFTs as drawings put on the blockchain.
Recently, Ozzy Osborne announced he would drop 9,500 drawings of “crypto bats.” To buy one at the wholesale price, you need to attract the attention of the moderators on his discussion board. Then, you can sell it for a profit at retail value – to someone who will sell it to someone else for even more. Critics say this reminds them of multilevel marketing i.e. a pyramid scheme.
The case of Tesla
There is a difference between a company with good stock and one with good products. Valuation is the connection between the two. The price you pay for stock determines the future return because the price will suddenly begin to matter when valuation stops rising.
Great product, but overvalued stock
For many, Tesla makes the best electric vehicles in the world. Its customers love its products. Unlike other major automakers, it has no advertising budget at all. Its marketing force is hundreds of thousands of loyal customers. Tesla can put the billions saved from advertising and marketing into higher profit, lower prices, or more R&D.
However, its market cap is $1 trillion, which is about as much as what the rest of the global auto industry is worth. Clearly, its stock is overvalued. People are paying more for a company that produces a million cars a year than for the rest of the industry, which is producing as many as 50 million.
100% loss or worse?
When people run out of money, Ozzy’s crypto bats will be worth nothing. This makes the loss 100%. However, it could be more if you resorted to leverage. Bubbles in history have shown that FOMO and greed can bring people to turn to leverage. Today, it has never been easier to borrow money.
