Financial markets are about price discovery, not value.
There is this habit of looking and thinking about companies based on ‘market capitalization’ or ‘latest valuation rounds’. We take the last trade and extrapolate that one-millionth of slice to represent the whole pie.
The truth is obviously that is false.
What is realistic when you look from an outsiders perspective is that there is a spectrum of value to shares of a company. On two ends of the spectrum the last shares available in an extremely liquid market is priceless (left tail) where the last shares available in an illiquid market is worthless (right tail). Classic normal distribution.
This is the divergence if why Warren Buffet wouldn’t buy all the Bitcoin in the world for $25 (Vega, 2022), yet Ark Investments Cathie Woods say it will be soon worth $1M per Bitcoin (Bellusci, 2022). One is thinking of the right tail of the distribution, the other is the left.
The key for retail investors is understanding that both Buffet and Woods are right, but one is talking about the VALUE, and the other is talking about the PRICE.
In the same way, shares of equity companies in the S&P 500 are also fundamentally in the same conundrum as Bitcoin. Even dividend paying stocks are only worth a few multiples of the dividend, because you as a small owner have ZERO control of the dividend continuing. But especially for stocks like META, where you explicity have no control of anything the company does. Analysts pore over earnings and sales figures to decipher value, but none of that will ever flow to a single retail shareholder. It’s all just narrative.
On the flip side, Retail shares of equity companies are also fundamentally exponential in price, but only as long as you have someone on the other side of the trade.
That in the end is the difference. VALUE does not need a counterparty, and PRICE does.
FTX is a perfect example. They created their own 'coin' that had ZERO value, but exponential PRICE. So, when the buyers took a pause, the PRICE quickly reverted to the VALUE. The failure, EXACTLY like in 2008 Sub-Prime Crisis, is that Banks and Pension Funds, felt left
In the end Value really only comes from two places: required interest payments (like bonds) or capitalized future expense (like housing or some commodities). Everything else is just narrative that requires a counterparty.
Reference:
Bellusci, M. (2022). Cathie Wood's Ark Invest Predicts Bitcoin Could Exceed $1M by 2030. CoinDesk. coindesk.com/business/2022/01/25/cathie-woods-ark-invest-predicts-bitcoin-could-exceed-1m-by-2030
Vega, N. (2022). Warren Buffet Wouldn't Buy 'all of the bitcoin int he world' for $25. CNBC. cnbc.com/2022/05/02/warren-buffett-wouldnt-spend-25-on-all-of-the-bitcoin-in-the-world.html
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