The only reason to buy cryptocurrencies is the price, and if the price goes down, that reason weakens

Something called Luna, which apparently is (was?) a cryptocurrency, fell 99.98% in about a week. In fact, the arithmetic of the fall was extremely entertaining and educational. It fell 96.7% in four days, then another 99.3% over the next two days. Presumably, the full name of the currency is “crazy” and it is named after people who have invested in it. If the media stories are to be believed, there were a lot of Indians who had invested in this thing. If your credit was worth Rs.1 lakh on May 5, you might still be able to buy a samosa with it, provided you don’t go to an expensive place.

As I write this page, I hear TV presenters screaming about the staggering losses. However, I don’t think these losses are staggering at all. In fact, they’re not even slightly surprising – they’re exactly what one should have expected from this crypto nonsense. It’s just a so-called currency – such things will be common throughout the crypto wasteland in the days and weeks to come.

The best comment I read on social media about crypto was this: fed up with people calling everything in crypto a Ponzi scheme. Some crypto schemes are pump and dump schemes, while others are pyramid schemes. Others are just standard cheats. Others are just middlemen skimming the top. Stop ignoring the diversity of the industry. However, I don’t really intend to write about it today – there is nothing new in it and it makes no sense to engage with the kind of people who are obsessed with it all. I just hope that the type of tax structure that this year’s budget introduced for cryptocurrencies means that relatively few Indians will be affected by the crypto disaster.

The most mind-boggling idea is that investors should stick with “conservative options” like Bitcoin instead of fringe options like Luna. Strangely, even today there are a lot of people saying that since crypto has dropped so much, it’s a much better value now. This is a complete perversion of what ‘value’ means in investing. There is no “value” in an investment in which there is no underlying economics. A few weeks ago, at the start of the current crypto crash, Nassim Nicholas Taleb tweeted this: For a contagion-focused asset with no economic anchor like #BTC, a price drop does not make it “cheaper” and more attractive . A falling price makes it less desirable and, paradoxically, more expensive. Why? Because the price is its ONLY information.

If you think about what he means when he says “price is his ONLY information”, you will understand the whole story effortlessly. A company’s stock price has an underlying financial logic. This logic stems from its business history, the profits it makes and will continue to make in the future. This means that if the stock price drops and the trading parameters remain the same or improve, the stock becomes cheaper and therefore more desirable to buy. In fact, that is exactly what is happening in Indian stock markets these days. Stock prices are crashing, but the trading metrics of many fundamentally sound companies are stable or improving. This makes it a better value for investors.

That’s pretty much what value means in investing. Cryptocurrencies have no such underlying economic logic. The only reason to buy is the price and so if the price goes down, then that reason weakens. There is no way to calculate the value. It’s a pure and simple bet. There is nothing else there. On top of that, there are issues like taxation and the need to trade through obscure entities that are self-declared exchanges but not regulated by anyone. If you still want to play, go ahead but don’t say no one warned you.

(The author is CEO, VALUE RESEARCH)


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