Recently, Paul Krugman, a renowned American economist has published an article in a local daily. Krugman is a Nobel prize winner in economic sciences and his recent article talks about Tesla, Bitcoin and their huge valuations.
Krugman’s article points out that there might be more similarities between Tesla and Bitcoin than one can think of. He explains that mega-corporations like Apple, Microsoft, and Amazon have maintained their dominance because these companies are able to reap “benefits from their strong network externalities.”
Putting it in simple words Krugman adds that, “everyone uses their products because everyone else uses their products.” Thus, a large customer base of such companies is driven by the hype and trend as prevalent in times.
Now, Krugman points out that it would be interesting and difficult to see what would give Tesla a long-term lock on the electric-vehicle business.
Emphasizing on the fact that “electric vehicle production just doesn’t look like a network externality business,” he questions in his article:
“Where are the powerful network externalities in the electric vehicle business?”
Krugman then mentions that it is difficult to explain the huge valuation the market had put on Tesla before the drop of prices or even presently at its current value. However he further explains his beliefs on the high worth of Tesla. He believes that it was majorly fueled by the investors’ infatuation over the idea of the company being run by a brilliant cool innovator. He says:
“Investors fell in love with a storyline about a brilliant, cool innovator, despite the absence of a good argument about how this guy, even if he really was who he appeared to be, could found a long-lived money machine.”
The economist conveys his confidence in the fact that the Tesla sales have been dependent at least in part on the perception that Musk himself is a cool guy.
Describing a parallel between Tesla and Bitcoin, Krugman mentions that even after years of hard work no organization or individual has managed to find a sincere use of it. He added that the asset’s prizes have only soared because of the hype. The article read:
“Despite years of effort, nobody has yet managed to find any serious use for cryptocurrency other than money laundering. But prices nonetheless soared on the hype, and are still being sustained by a hard-core group of true believers.”
Krugman says that something similar must have also happened in the case of Tesla even though the company does make useful things.
In November, Morgan Stanley, an American multinational investment management and financial services company, published a report comparing the performances of Bitcoin to Tesla. The report stated that “Bitcoin and Tesla both have been trading virtually in lockstep, i.e., following the same trend over the past year.”
As of writing, Tesla’s stock has fallen 70% year-to-date while bitcoin’s price has dropped 65% during the same time period.