There has been a lot of debate on whether crypto tokens are a sound and rational investment. We often hear people say that cryptos have no underlying assets and hence no intrinsic value. Equity, on the other hand, is backed by a company’s financials and has an intrinsic value making them a more sensible investment. But is it?
Although equity shares have an intrinsic value in the form of company financials, the market value of the shares is largely decided by market sentiment and perception. Hence, the market value may or may not reflect the true intrinsic value of the share. Investors in equity, hence, rely on the economics of supply and demand to determine the value of the shares and try to outsmart the market to make a return on their investment. I do not disagree that the fair value of the shares can be determined based on the historical cash flows and dividend payouts, but the fact still remains that a large number of traders buy and sell shares based on intuition, hearsay, or advice from friends and family.
In such a scenario, the ‘underlying asset’ in equity shares is knowingly or unknowingly ignored when making trading decisions. The entire game depends on reading the market sentiment, knowing how the larger public would respond and using that to earn a profit. And when a majority of the public trades are based on market sentiment, the value of equity shares is what the collective intelligence of the public decides it to be.
In this background, isn’t trading in Crypto not similar? The value of the crypto token is what the public says it is. Sure, there is no underlying asset or no intrinsic worth; but who thinks about that anyway? The key lies in reading the trends and knowing how the public would respond to world events. In this sense, I do not see trading in Crypto tokens or NFTs or Equity much differently. People are trying to make money where possible.
Having said this, the fact that equity markets are well-regulated does reduce the systemic risks in the equity market. The lack of regulation in crypto/NFT trading makes it a hotbed for complex financial instruments and people can end up losing tons of money through loss of value. The ongoing debacle is proof. Crypto lending companies like Vauld, Babel Finance and Celsius are already putting limits on withdrawals and are heading towards bankruptcy.
Although trading in equity and crypto feels fundamentally the same in some sense, lack of regulation makes trading in Crypto/NFTs way riskier than trading in equity. Until crypto is subjected to regulation, it is best to be vary while investing in these alternative asset classes.