Nobel prize winner economist Paul Krugman compares Tesla with Bitcoin saying that they have more in common than we might think. He makes a lot of sense in the comparison that he makes. Paul believes that, like Bitcoin, whose price is supported by a group of “hard-core group of true believers,” even Tesla’s stock price is supported by the idea that Elon Musk is cool. To some extent, this is true!
Tesla and Bitcoin
The 2008 novel prize owner in Bitcoin has given some pretty strong opinions on the largest electric vehicle company Tesla and the largest cryptocurrency, Bitcoin. He then says that the largest organizations on the planet, like Apple, Microsoft, Google and many others, dominate because everyone uses their product. It is the network effect where you start using something because your friends and family use it. For example, a friend circle where everyone user’s message is likely to push Android users to move to iPhone.
Now, when you think about Tesla in this sense, it is hard to understand how it can dominate the electric vehicle market. How does the network effect apply to them? In fact, Paul Krugman believes that this effect doesn’t even apply to them. So, the valuation Tesla had before the price drop happened is hard to justify.
The only reason that the price of Tesla’s shares soared so much was the perception that Elon Musk is a really cool guy. He was selling cars, but more than that, Elon built an image of them being a futuristic company which everyone loves.
After this comment, Paul drew a comparison between Bitcoin and other cryptocurrencies. He said that despite so much effort, we have hardly been able to find some use cases of crypto. The only place it has been mostly used is money laundering. However, the price of Bitcoin has been able to rise, nonetheless supported by a small group of believers who believe in the cool future it promises.
With all those similarities as well, Tesla and Bitcoin’s price action has also been similar. The share price of the electric company has fallen 70% year-to-date, while Bitcoin’s price is down 65% during the same time.
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