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    Why are investors gung ho on Bitcoin, Tesla? Raghuram Rajan has a theory


    Raghuram Rajan says Tesla is another case where investors have priced the stock at many multiples of the price of solid car companies like Toyota or GM.
    Former RBI Governor Raghuram Rajan said things like Bitcoin and Tesla have got priced up, because people are just jumping in.
    NEW DELHI: Ever since global markets started rebounding from their March lows, the prices of Tesla stock and Bitcoin have defied gravity as well as valuation metrics. Former Reserve Bank of India (RBI) Governor and eminent economist Raghuram Rajan says the cryptocurrency is nothing but a classic case of bubble, while the momentum in the Tesla stock is being driven partly by hordes of small investors.

    “Temporary low performance is being ignored in favour of the idea that we are going to get a strong rebound and things are going to look good going forward. Low interest rates in the near term do not matter relative to the long term. Those are the calculations the market is making. There is, of course, the froth that small investors induced in the markets and this is where things like Bitcoin, Tesla have got priced up, because people are just jumping in,” Rajan said in an interview with ETNow.

    Bitcoin, the virtual currency launched in 2009, scaled new highs after rising more than 400 per cent over the past year. After hitting the $40,000 mark, Bitcoin settled below $37,000 level last week.

    “Bitcoin is the classic bubble, it produces no value. It is an asset that cannot even be used for payment, because it is really difficult. As my friend Austan Goolsbee says, they do not take Bitcoin as payment at Bitcoin conferences, because it is just too costly and yet it hit $40,000! So why are people buying Bitcoin? They think it will go up and that is very bubblish in thinking," he says.

    Tesla, up over 700% in the past 12 months, has become the most valuable auto firm in the world by far, even though it produces only a fraction of what rivals such as Toyota Motor, Volkswagen and General Motors do.

    Rajan says Tesla is another case where investors have priced the stock at many multiples of the price of solid car companies like Toyota or GM. Presuming that there are similar stocks in India where punters think they can make a quick buck and get out, things get driven up, he said. “Markets are pricing in a strong recovery from the second quarter and that is part of the reason for the exuberance across all assets, which is partly why the Indian market is going up,” Rajan said.

    Explaining the flow of money, the former chief economist of IMF said once you have priced up the S&P500 and gone to value from growth stocks, you look for emerging market stocks and for high yield bonds. "Every asset is being priced up, and that is partly the reason why Bitcoin is in the stratosphere. India is not unique in this. Every emerging market is experiencing this. The question is, how much of this is justified given the economic conditions,” he said.

    On the disconnect between stock market performance and the economy, Rajan said low interest rates, manufacturing growth and the fact that many large companies are benefiting while small companies are going out of business have created a temporary positive sense about where the economy is going.

    "Looking at the Sensex, one thinks problems are over. No, they are just starting,” he said. His only piece of advice to investors in the current market is to stay diversified.
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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    18 Comments on this Story

    Ashutosh Gupta44 days ago
    Truth about economy is well known, but don't get too much engaged on truth trap. Invest, stay conscious take your pai from market and come out.
    Shaleen Nath44 days ago
    Today money's value is tied to nothing and the central bank prints currency while maintaining inflation targets, it is not tied to gold or anything... These are investment goods with a value in currency terms or exchange value, these bitcoins and the major Tesla viewed by investors as profitable ventures, there is nothing like bubbles if it is backed by earnings growth... if inflation is low and stable... Many central banks have allowed bitcoin exchange and in the stock market...
    SC44 days ago
    Bitcoin is a Ponzi scheme launched by very clever international criminals. When you lose money, there is nobody to blame for it. Don't call it currency. You don't need bitcoin for anything except for selling it to another fool who is willing to buy "nothing" from you at a higher price.
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