Why investors are more sceptical than ever

Other businesses in the space have been accused of going beyond generating hype and instead engaged in outright lying. 

The Chinese government launched a fraud investigation in 2016 after it alleged that many of the country’s electric vehicle manufacturers had been producing electric cars and selling them to companies they also own in order to secure government subsidies.

But despite high profile scepticism of the sector, many sophisticated and armchair investors remain more excited than ever about the potential of electric vehicle companies.

Dan Ives, an analyst at Wedbush Securities, says surging valuations for electric carmakers naturally fuels scepticism. But unlike the dotcom boom, “these companies are betting on a market that is here and is on a trajectory to see massive growth,” he says.

“You’re talking about a very investable trend, rather than a trend that’s just built on hype,” Ives believes. 

This trend has hooked in thousands of armchair investors, with many initially discovering the field through Tesla. “It’s an emotional stock,” says Vincent Deluard, director of global macroeconomics at StoneX Group, referring to Tesla. “You have hardcore believers and profound haters at the same time.” 

Most of the action, he says, is concentrated on options – suggesting the now-familiar presence of individual day traders using low-fee or no-fee services such as Robinhood.

The so-called “Robinhood investors” are often blamed for 2020’s wild market rally, as well as the surge in stocks for many companies. Reddit’s WallStreetBets community in particular has been known to worship Elon Musk. 

Robinhood itself has been accused of using addictive techniques from smartphone games to keep its users trading.

According to Deluard, day traders often prefer options to straight shares because they are the most efficient way of piling up leverage on already-hot stocks. Yet as they do so, the broker-dealers they buy from are forced to hedge their own positions, often by snapping up competing stocks rather than betting against themselves directly. 

The result is a dangerous “feedback loop” of volatility that could amplify any big correction. Worse, early companies with strong futuristic missions are more likely to have their shares locked up with owners or long-term bulls, creating a “stampede” for others to get in.

The final impact of this stampede is yet to be seen. So far, no large Western electric vehicle manufacturer has been revealed to be an investment scam. 

But sceptics warn that as hype continues to grow in the land of electric cars, following on from Tesla’s grand claims, it’s only getting more likely that unscrupulous fraudsters may seek to mislead the public. And the people who may stand to lose the most are the armchair investors caught up in the hype machine of electric vehicles.

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