October 2021 has been a month of enthusiasm about the cryptocurrency market. Bitcoin (CCC:BTC-USD) reached a new historic high near $67,000 and other altcoins such as Cardano (CCC:ADA-USD) joined this frenzy.
Why call it a frenzy? To start, I am not a believer in the future of the cryptocurrency market. I consider the majority of these digital tokens as being in a historic bubble.
Does this include Cardano as well? I argue that yes, it does. And while I see some positive aspects of Cardano, I consider its current price around of $2-plus to be out of tandem with logic.
Cardano in early 2021 was trading at 18 cents. It has appreciated about 11 times (or 1,100%). It is fueled, along with the whole cryptocurrency market, by FUD (fear, uncertainty, doubt) and FOMO (fear of missing out) biases. This has delivered impressive gains to investors and traders who believed in its future.
Assuming you could invest $1 million in ADA token in early January, you would have about $11 million now. This is an overall return that is astonishing. Read on to see why I am not a supporter.
Logic vs. Irrational Exuberance
It seems impossible that Cardano has a market capitalization of about $74.5 billion. It is close to the recent market capitalization of General Motors (NYSE:GM) of $83.7 billion when the GM stock price was $57.67.
Also, the market capitalization of Cardano now is almost twice what shares of The Travelers Companies (NYSE:TRV) are worth, with a market capitalization of about $39 billion at around $160 per share.
Investors use future cash flows to discount them companies into the present and evaluate the true or intrinsic price of stocks compared to their share price. Altcoins do not have any cash flows. So, without any cash flows, it is plausible to argue that their intrinsic value is simply $0.
Or, in what crypto enthusiasts do not want to hear – or read – that the cryptocurrency market is an epic bubble. Is Cardano an exception? No. Why should it be?
Stock or Crypto?
Consider the following scenario for one moment. A group of 75 billionaires met and decided to either use their capital to buy either all ADA tokens (at least the ones that are currently available) or instead buy shares of General Motors. Of course, the scenario is simplified as General Motors has also a lot of intangible value, but let’s assume this was the main question on the billionaires’ agenda.
What are the odds of investing in the unknown, with zero cash flow, having a wild price run in 2021 to the edge of bubble territory and hope that it changes the world of finance? This is Cardano.
Now, on the other hand, set emotions aside and realize what may seem like a hot investment trend is disconnected from reality. Consider instead that all factors, including a history of business, point to skipping the crypto market and invest in what seems a safer, more stable business opportunity. That is General Motors.
On top of that, psychology is everything in today’s modern life. You can touch, smell, see a GM vehicle. You can only see Cardano in your digital wallet, and you hope and pray that hackers do not steal it.
For the sake of this analysis, I am not saying that GM stock is a hot stock now, but it is comparable in market cap capitalization with Cardano. This is beyond any logic to me, however. The valuation of Cardano today is unreasonable.
Looking Back at Cardano
In my previous article about Cardano, “Cardano Faces an Uphill Battle to Change the Finance World,” last May, I argued that “ADA has several advantages over competitors, but not enough to merit its recent price surge.”
Until it is more widely embraced, I wrote that Cardano was overvalued and potential investors “wait and see” before deciding to buy.
It’s not that Cardano is without merit. ADA is an altcoin that is scalable and flexible, especially with the latest Alonzo upgrade. The coin is environmentally friendly and oriented toward sustainability. It may well thrive in the dapp development in the future.
But to me, what matters most is valuation and fundamentals. I dare to say that the cryptocurrency market could face a historic crash when expectations and logic start moving in the same direction.
Euphoria at an extreme level in the crypto market. Beware of these risks.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.