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Bitcoin enthusiasts are in the midst of an existential crisis. Since its high in mid-April, the price of Bitcoin has fallen 47%. Meanwhile, China, where three-quarters of the world’s supply comes from, is cutting back mining and trade. And how strong is the world’s largest cryptocurrency when a few cryptic tweets from Tesla Inc. founder Elon Musk can make it wobble? Institutional investors are heading for the exit – for gold.
But true believers take heart! Other investments require even greater acts of faith. You can do a lot worse than Bitcoin.
Bitcoin has a simple concept: it’s a digital token with a finite supply that has been around for 14 years. By comparison, in the traditional world of stocks and bonds, you’ll be hard pressed to find assets that have such investor enthusiasm and such a clear history to sell.
Think about the craze for electric vehicles. QuantumScape Corp, a $ 12.3 billion market-capitalized electric vehicle battery maker that counts Volkswagen AG and Qatar Investment Authority among its major shareholders, went public through a reverse merger with a SPAC last November. This stock has done worse than Bitcoin, losing nearly two-thirds of its value this year. The reason? It’s too mysterious.
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QuantumScape has made some bold claims: that it could extend the range of electric cars by up to 50% while drastically reducing the charging time for a long drive to just 15 minutes. So far, the promised breakthrough is only supported by limited preliminary data. Secrecy is common practice in battery development: The company didn’t even name its scientists in an interview with Bloomberg for fear of poaching by rivals. Managing Director Jagdeep Singh said he “never understood why [getting a third-party lab to test our cells] is considered more objective. Mass production is not in sight for this zero-income start-up, whose operating losses are on the rise.
The opacity and hype not only raised doubt, but also attracted short sellers. Activist company Scorpion Capital has called the company a “scam.” In response, Singh said, “The reason for the secrecy is that it takes a lot of time and energy to work on these new materials.” Perhaps to avoid controversy, QuantumScape should have remained a unicorn a little longer and not take advantage of the PSPC craze to make itself known to the public.
Bitcoin’s main selling point is finite supply. The same can’t be said for stocks: Companies can issue new stocks for a variety of reasons – and it’s an art to guide retail investors towards a positive interpretation of stock sales. Most people don’t do it well at all. Consider the experience of the China Evergrande Group’s $ 43 billion market-capitalization electric vehicle unit, whose shares have seen more volatility than Bitcoin this year. Much like QuantumScape, the electric vehicle maker has yet to start mass production. It was only this month that it held the “summer calibration test initiation ceremony” of five models of its Hengchi vehicles, according to the company.
In January, shares of China Evergrande New Energy Vehicle Group soared after the unit raised HK $ 26 billion from billionaire founder Hui Ka Yan’s usual investor group: his mogul friends. At the time, retail investors viewed this investment as a vote of confidence from the bigwigs. But in May, they changed their mind when the parent company raised around HK $ 10.6 billion by selling its shares, with a steep 20% discount. Evergrande explained that the transaction would reduce the ratio of the top 20 shareholders to less than 90%, paving the way for inclusion in Hong Kong Stock Connect, a trade link that allows investors from mainland China to buy shares listed in Hong Kong.
The stock market disagreed, with many interpreting the move as a way for Evergrande’s parent company New Energy Vehicle – Hui’s indebted real estate development company – to cash in. During a call to investors in early April, according to Debtwire, the developer said he plans to raise 50 billion yuan in equity each year, including the spin-off of non-real estate companies. The parent company Evergrande and its associates hold 67.6% of the capital of the EV unit. On Monday, the New Energy Vehicle Group share closed 16.3% lower than its placement price in mid-May.
Bitcoin enthusiasts should take comfort in the fact that their beloved token has the astonishing asset of an alluring and straightforward story of supply and demand. And that this is the rare example of the Tinker Bell effect. If you remember, Peter Pan resuscitates his dying friend covered in pixie dust by begging the audience to clap their hands if they believe in fairies. They did, and so she continued to exist. This is the case with Bitcoin and its followers. We live in a world of many unicorns, but a real Tinkerbell is hard to find.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
To contact the editor responsible for this story: Howard Chua-Eoan at [email protected]
Before he’s here, he’s on the Bloomberg terminal.
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