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The Value of Crypto

I’m Taking a Billionaire’s Approach to Crypto Investing

Forethoughts

I recently read a great article about Charlie Munger and Warren Buffett’s investment strategies and how they became such dominant forces in today’s financial world. It’s interesting to mention these two billionaires when writing about crypto because as most know they hate it… really.

“If you told me you owned all the bitcoin in the world and you offered it to me for $25, I wouldn’t take it,” — Warren Buffett

“Sometimes I call it crypto ‘crappo,’ sometimes I call it ‘crypto s — -.’ It’s just ridiculous that anybody would buy this stuff,” — Charlie Munger

It goes without saying that these two billionaires aren’t apeing into the next altcoin. Everyone has their own opinion, and these two billionaires have a lot of experience and knowledge to back their opinions. However, I disagree with their outdated stance on cryptocurrency. Please don’t misunderstand me. I don’t mean to be rude, but I believe that their views are outdated and historically based which is not applicable being Crypto has only had a few cycles to date. If we look back to 1965, when Warren Buffett acquired Berkshire Hathaway, he faced a lot of criticism because people believed it was a bad investment. However, instead of listening to the opinions of others, he evaluated the value of his investment using a few key factors:

  • Future Earnings Potential
  • Sustainable Competitive Advantages
  • Proven Management Teams
  • Investment’s “Intrinsic” Value Estimate is Higher than the Current Price

This is how Buffett and Munger made billions, they used a strategy called “Value Investing”. Keep in mind that this article is purely for entertainment and informational purposes and is not financial advice.

What is Value Investing?

Value investing is an investment strategy that involves selecting stocks or other securities that appear to be trading at a price lower than their intrinsic value. In other words, value investors seek to identify assets that the market has undervalued or overlooked. The goal is to buy these undervalued assets and hold them for the long term, expecting their value to increase over time as the market recognizes their true worth.

Key principles of value investing include:

  1. Intrinsic Value: Value investors try to estimate the intrinsic value of a security, which is the true, underlying value of the asset based on factors such as earnings, dividends, growth rate, and other fundamental analyses. This intrinsic value is then compared to the current market price.
  2. Margin of Safety: Value investors often look for a margin of safety, which means buying a security at a significant discount to its intrinsic value. This provides a cushion against potential errors in the valuation process or unforeseen market fluctuations.
  3. Long-Term Perspective: Value investing is typically a long-term strategy. Investors who follow this approach are willing to hold onto their investments for an extended period, waiting for the market to recognize and reflect the true value of the assets.
  4. Contrarian Approach: Value investors often take a contrarian approach, meaning they may go against prevailing market sentiment. If a stock or market sector is undervalued due to negative sentiment, a value investor might see it as an opportunity.

I hope the alarms went off once you read “expecting their value to increase over time as the market recognizes their true worth”. Ding ding ding, that’s the golden ticket… “true worth”. Many investors have not realized the worth of Bitcoin and other alt-coins because there is a lack of understanding and vision for the real-world application of different blockchain networks. That is what I’d like the explore now, the value of digital assets based on its technology and real-world capabilities.

What is the Value of Bitcoin, Ethereum, and other Alt-coins?

A picture is worth a thousand words, but a video is worth a lot more. Here’s a popular video that you may have seen that is possibly the greatest explanation of Bitcoin and Ethereum of all time. Cryptocurrency is still in its infancy, and because of that, many people still haven’t taken the time to understand what Bitcoin’s network does as well as what Ethereum’s network does. The value of these tokens lies in the knowledge and use case behind blockchain networks. Once you understand what Bitcoin, Ethereum, and other altcoins are solving for and the technology behind them, then you can give these tokens a proper price evaluation rather than loosely speculating.

Explaining Bitcoin (skip if you watched the video)

If for some reason you did not want to watch the video I will make my best attempt to explain Bitcoin in laymen’s terms. Imagine you have a digital wallet that stores your money electronically instead of keeping it in physical cash. This digital wallet is secured by a complex mathematical system that makes it almost impossible for anyone to steal your money. That’s essentially what Bitcoin is. Bitcoin is a decentralized digital currency, meaning it’s not controlled by any government or financial institution. Instead, it’s maintained by a vast network of computers all over the world. These computers keep track of every Bitcoin transaction that ever happens, and they make sure that no one can spend the same Bitcoin twice. Bitcoin is often described as a “peer-to-peer” currency because you can send it directly to someone else without needing a bank or other intermediary. This makes Bitcoin transactions faster and cheaper than traditional bank transfers. Bitcoin is also a limited-supply currency, meaning that there will only ever be 21 million Bitcoins in existence. This scarcity, along with its growing popularity, has made Bitcoin a valuable asset. Whew! That is about the longest I have gone writing without writing something sarcastic or trying to be witty which is hit or miss at best. Now that I’ve given my brain a second to breathe with this sidebar I should try to dive into Ethereum which in my opinion is more complicated to explain.

Explaining Ethereum (skip if you watched the video)

Ethereum is like Bitcoin’s older and more ambitious brother. It’s also a decentralized digital currency, but it goes beyond just being a payment system. Ethereum is a platform for building decentralized applications, or DApps. These are applications that run on the Ethereum blockchain and are not controlled by any single entity. This makes Ethereum a very powerful tool for innovation. Developers can create all sorts of new applications that would be impossible to build on traditional, centralized platforms. Some examples of DApps include Decentralized Exchanges (DEXs), Decentralized Finance (DeFi), and Non-fungible tokens (NFTs).

It’s important to understand the fundamentals behind Ethereum as it’s the most popular Layer 1 Blockchain. This understanding helps us analyze the value of other Layer 1 Alt-Coins like Solana, Avalanche, Polkadot, Cosmos, Near, Algorand, and Cardano. Currently, Bitcoin and Ethereum hold the #1 and #2 spots in the Cryptocurrency market because they are the most proven projects. It’s not a stretch to say that their dominance could be overtaken in the future if one of these other projects utilizes better technology or alleviates the pain points of BTC or ETH.

Let’s Use Solana as an Example

Solana gained the nickname “Ethereum Killer” due to its impressive performance and potential to address Ethereum’s limitations. The price of Solana quickly soared hitting ATHs but then plummeted back down to Earth because of their association with FTX. At the time of writing this article, Solana is +286% YTD. I think Solana gives us a great perspective on the value of an Alt-Coin. Solana’s technology and ability to scale are impressive, this is what I would use to determine Solana’s intrinsic value. Solana boasts impressive scalability, capable of processing up to 50,000 transactions per second (TPS), far exceeding the 15–20 TPS of Ethereum. It also promotes exceptionally low transaction fees in comparison to other popular blockchains, making it a more cost-effective platform for users and developers. Although Munger and Buffett are not high on crypto I believe that these are the types of factors they’d be evaluating if they were looking to take a position in the crypto market.

After Thoughts

I had fun writing this article! It really dissects my approach to buying and selling Cryptocurrency. Just for a little context, my dad managed a private hedge fund when I was growing up so I was exposed to a lot of ideas about mortgage bonds, options, etc… I’m by no means like my dad when it comes to trading. I am a long-term investor period so I do not make trades. I am a HODLer (hold on for dear life). There are a lot of videos, articles, and news stories that can get people really turned around about crypto. I hope that this article will encourage you to think for yourself and meticulously craft your own view of cryptocurrency. Whether you’re on the moon, sifting through the fud, or dragging crypto through the mud, please be intentional and educated about it. That being said, my intent was for this article to be completely educational and entertaining. If you feel that my explanations were not factual or could use some work feel free to comment about it. It’s always my intention to provide the most factual information that I can but being human I can make mistakes and would love to be educated about them if they occur. I hope you enjoyed this article and if you did please consider following, clapping, and commenting on what you enjoyed. Cheers!