Cryptocurrency: Only reason to buy cryptocurrencies is the price, and if the price falls, then that reason gets weaker


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

As I’m writing this page, I can hear TV anchors screaming about the staggering losses. However, I don’t think these losses are staggering at all. In fact, they are not even mildly surprising—they are exactly what one should have expected from this crypto nonsense. This is just one so-called currency— such things will be routine across the entire crypto wasteland in the days and weeks to come.

The best comment I read on social media about crypto was this: Sick of people calling everything in crypto a Ponzi scheme. Some crypto projects are pump and dump schemes, while others are pyramid schemes. Others are just standard issue fraud. Others are just middlemen skimming off the top. Stop glossing over the diversity in the industry. However, I don’t actually intend to write about this thing today—there’s nothing new in it and there is no sense in engaging with the sort of people who are obsessed with all this. I just hope that the kind of tax structure that this year’s budget brought in for crypto currencies means that relatively few Indians will be impacted in the crypto disaster.

The most mind boggling idea is that investors should stick to ‘conservative options’ like Bitcoin instead of fringe ones like Luna. Strangely, even today, there are plenty of people who are saying that since crypto has fallen so much, it is 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. Some weeks back, at the beginning of the current crypto crash, Nassim Nicholas Taleb tweeted this: For a contagion driven asset with no economic anchor such as #BTC, a falling price does not make it “cheaper” and more attractive. A falling price makes it less desirable and, paradoxically, more expensive. Why? Because price is its ONLY information.

If you think about what he means by saying that ‘price is its ONLY information’ then you will understand the whole story effortlessly. The stock price of a company has an underlying financial logic. That logic arises from its business track record, the profits it makes and will continue to make in the future. This means that if the stock price falls and the business parameters remain the same or improve, the stock becomes cheaper and therefore more desirable to buy. In fact, that’s exactly what is happening in the Indian stock markets nowadays. The stock prices are crashing but the business parameters of many fundamentally sound businesses are stable or improving. That makes them a better value for investors.

That’s pretty much what value means in investing. Cryptocurrencies have no such underlying economic logic. The only reason that is there to buy is the price and so if the price falls, then that reason gets weaker. There is no way to calculate value. It’s a gamble, pure and simple. There is nothing else there. On top of that are the issues like taxation and the need to trade through shadowy entities that are self-declared exchanges but which have no one regulating them. If you still want to gamble, go ahead but don’t say that no one warned you.

(The author is CEO, VALUE RESEARCH)



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