BITCOIN, TESLA MANIA EVOKE MEMORIES OF DOT-COM BOOM
We live in interesting times, with all kinds of new technologies attracting the attention of investors keen to bet on which will go mainstream and be truly disruptive.
These kinds of booms usually require some form of catalyst and this time around it is the COVID-19 lockdowns, which have caused the digital transformation of the global economy to accelerate. We think there are a lot of parallels to the late 1990s following the introduction of the internet and connectivity.
Back then, the level of speculation was also pushing record levels with investors trying to figure out who would dominate in the emerging digital world.
However, the problem was for every Amazon, Google or Apple there were a thousand failures and it took another decade even for these three companies to scale out their products/services and really shine. Their share prices followed a similar trajectory, and didn't really take off until after the 2008 financial crisis when capital was cheap, and the internet could finally be leveraged.
We think the same situation is playing out for two technological innovations that are gaining the most attention today — Bitcoin and Tesla. Investors are betting on Bitcoin as a disruptive force to traditional currencies fuelled by worries over inflation and reckless government spending, which is now being supported by money printing.
In the case of Tesla, there is a cultish narrative with many calling for the end of gasoline-powered vehicles. We think the question of whether they will dominate in the years to come, as their followers believe, will come down to their ability to scale.
For those wondering what is required for this to happen, there is no better comparison than Apple, which saw iPhone annual sales rise from 1.39 million in 2007 to a whopping 216 million 10 years later, according to Statistica. Can Bitcoin and Tesla follow that kind of trajectory? Here's a look at some of the key factors that allowed Apple to scale.
EASY AND SAFE TO USE
Upon its introduction, the iPhone was shockingly user-friendly making it easy to transition away from BlackBerry and Android models as well as for those switching from a traditional flip phone.
The iPhone was also known for the security of its software, and quality and reliability of its hardware. Apple then took it to another level by creating its own ecosystem, introducing other Apple products that were also extremely easy to use.
In the case of Tesla, while it may offer a great driving experience, from a practicality standpoint it faces challenges from the lack of supporting infrastructure, such as charging stations. Imagine if the iPhone was rolled out in the 1990s with few cellphone towers, and still dominant dial-up internet connections.
While electric vehicle infrastructure is improving, it could put a limit on Tesla's immediate growth prospects.
Bitcoin meanwhile, also suffers from a lack of integration into the payments and asset-trading ecosystems, a big part of the reason it is not widely being used as a means of exchange, its intended function.
According to Chainalysis and as cited in the Wall Street Journal, digital-payment processors handled only $269.7 million of global merchant sales in Bitcoin last November compared to $546.5 billion in total U.S. retail sales during the same period.
Then there is the complexity of its overall security and settlement process, which we think is scaring away the average consumer, especially the Baby Boomers who are only just recently going cashless.
AFFORDABILITY
If you want everyday use of a product or service, it is going to have to be affordable to the average consumer or at least comparable to what it is trying to disrupt.
The iPhone when launched was at a similar price to its competition but offered a vastly superior product. That said, while expensive, an iPhone was still attainable for many.
On the other hand, the lowest-priced Tesla model 3 begins at $51,000 and goes up to $73,000, which is a substantial premium to the average new car price of $40,000, according to the autoTRADER. It's one thing to splurge on an $800 phone, another to pay up for a luxury car.
While the price of a unit of Bitcoin has fluctuated wildly, it is subdividable, so you can buy as much or as little as you want.
But transaction fees can claw into that, making it less useful at this stage in smaller increments. Who is going to use fractional units to purchase everyday consumer goods such as a McDonald's drive-through or that pack of gum at the corner store?
MAINTAINING VALUE
In order to have mass adoption, there has to be some stability in the underlying product or service being offered.
Apple's iPhones not only maintained their monetary value but also their overall utility function.
Bitcoin, on the other hand, has experienced extreme moves in its valuation and lost more than 50 per cent of its value during last year's COVID-19 meltdown, before rocketing higher. That kind of volatility is something that mainstream users will want nothing to do with.
In regards to Tesla, according to J.D. Power's most recent Vehicle Dependability Survey, it placed 30th out of 33 manufacturers. We think the next decade will be exciting but hard to predict.
Looking at previous success stories and asking yourself honestly if you are the average person and would you use it, is a great first step in determining what it could potentially look like.
When it comes to digital currencies and electric vehicles, we think they both have a bright future, but we're just not so sure about the horses being chosen to represent them.
Financial Post Martin Pelletier, CFA, is a portfolio manager at WellingtonAltus Private Counsel Inc. ( formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.