By Vitaliy Katsenelson
Then there is the crypto universe insanity. I’ve spilled a ton of ink on bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.10% , but I’d like to point out again that there are thousands of competing cryptocurrencies fighting for dominance. For bitcoin maximalists, bitcoin is their only lord and savior and all other cryptos are heretics. Yet many believe that bitcoin is an inferior, crypto-stone-age type of technology and that new, technologically advanced alternatives are better (thus the thousands of cryptocurrencies). This crypto debate will end peacefully — with people losing money.
Since cryptos have no cash flows, I have no idea what their value is. However, my gut sense tells me that the price of cryptos today reflects an overabundance of both optimism and easy money.
But then we have the whole new level of crazy: NFTs (nonfungible tokens). You put a drawing of a flying monkey or a happy goat on a blockchain and you have got priceless, “finite,” “nonfungible” art. NFTs of apes that happened to be bored are selling for hundreds of thousands of dollars.
My son Jonah, a student at The University of Colorado, Boulder, told me that many of his friends are making money in NFTs, and most importantly, they’re bragging about it. They have suddenly become connoisseurs of digital art.
Jonah told me about the latest and greatest NFT: Ozzy Osborne of Black Sabbath fame recently decided to become a crypto artist and will drop “only” 9,500 drawings of bats, which Ozzy calls “crypto bats.” To get Ozzy’s art at a “wholesale” price, you must go on his discussion board and tell the world how much you love it. If you do this enough then board moderators may let you buy it at wholesale, so you can flip it to a greater fool at “retail,” who’ll try to flip to another even greater fool for a higher price after he brags how much money he made on NFTs, which are our digital future. Jonah asked me, “Dad, is that not by definition a pyramid scheme?” I am a proud parent!
As I am typing this I have caught myself wanting to say, every other sentence, “I kid you not.” So maybe we’re approaching the pinnacle of crazy.
When I discuss Coke, its overvaluation is not an abstract concept; it is quantifiable in brushstroke terms. Even Tesla’s overvaluation is not entirely abstract — you are paying more for a company that produces 1 million cars a year than you are for the rest of the industry that produces 40–50 times more cars.
Everything beyond that, from GameStop and AMC to crypto and NFTs, might easily be worthless and thus quickly turns into an abstract discussion. How much will Ozzy’s crypto bats be worth when the last college kid blows his tuition on them? I have an answer for you: zero. When zero is priced in relation $300 or $30,000, it is overpriced by infinity; in either case the loss is 100%. Actually, in many cases the losses will be greater than that. What we learned from previous bubbles is that greed and FOMO eats people from the inside and causes them to resort to leverage. Leverage ruins people’s lives, and it has never been easier to borrow money than it is today.
Sadly, a lot of people who are beating their chests and bragging how much money they are minting will lose their temporary gains and a whole lot more. The ultimate prize for crazy goes to Stephanie Mato — actually, not to her but to the people who spent $200,000 buying her farts in a jar. Stephanie had to make a personal sacrifice in order to produce them, resorting to an unhealthy, gas-producing diet. She had a mild health scare and decided to quit, but don’t worry (I kid you not), she is now making NFTs .
How do we invest in an inflationary environment? Read this article
Here are links to more of my views of the inflation landscape (read, listen) and how we invest in inflation (read, listen).
Vitaliy Katsenelson is CEO and chief investment officer of Investment Management Associates. He is the author of Active Value Investing: Making Money in Range-Bound Markets, and The Little Book of Sideways Markets .
To avoid being taken for a ride in speculative markets, review the fundamentals by reading the 6 Commandments of Value Investing. To get more of Katsenelson’s insights into investing, head to ContrarianEdge.com or listen to his podcast at Investor.FM .
More: ‘Good luck! We’ll all need it’: U.S. market approaches end of ‘superbubble,’ says Jeremy Grantham
Also read: No, Wharton students, the average U.S. worker does not make $800,000