Applying Buffett investment philosophy to cryptocurrency.
Obligatory Disclaimer: I am NOT a financial advisor, and none of this advice should be taken without speaking to a qualified professional first. Further, do NOT invest more than you’re willing to lose, and do your own research first.
When Warren Buffett began studying the value investing methods of Benjamin Graham, one of the first stocks in which he decided to invest was GEICO. Why? Because, at the time, it was trading for less than the value of its assets.
The process Buffett used (and probably still uses) to determine whether or not a stock is over or undervalued is by looking at some simple numbers: the company’s assets, their hard costs, and the price at which their stock is trading. Often, the market would not reflect the hard numbers, which would inform Buffett’s investment decision. Why don’t we do the same in the crypto world today?
I see several similarities between the stock world Buffett inherited in his young age and the current state of the crypto world. Both started out highly speculative with little practical analysis informing investment decisions. It was high risk — the Wild West, if you will, until men like Graham came along and offered some practical guidelines that anyone could utilize to make sound investment decisions. I believe crypto could take a lesson from the 1920s in two simple ways.
Generally speaking, crypto companies are small. They have a few staff that wear many different hats and bear a large burden of responsibility. Their growth potential is enormous. Even though they are tiny, these companies have assets that inform their value. These can include things like the following:
Rarely if ever are these factors considered when determining the potential value of a crypto company’s token, which is (or should be) a direct reflection of the company’s worth. But how do you actually quantify the cash (or BTC) value of a crypto company’s assets? This is a difficult question.
Crypto CEOs would need to willingly publish asset reports on a regular basis (perhaps quarterly), and would need to invite someone to audit them. This would be a major service to token holders, and would be a step in the right direction for regulatory preparedness.
But why would crypto CEOs want to voluntarily invite such scrutiny from a third party, or make such information public? Wouldn’t this make their life a little more difficult? Of course. Would it be a litmus test for scammers? Absolutely. I believe if you’re not a scam, you have no reason to hide your assets from the public. I’m sure the SEC would agree.
After analyzing the assets of a company, Buffett’s next step would be to review their costs. Simple mathematics say that subtracting cost from assets dictate the true value of a company, and should be reflected in the stock price. This is true for crypto companies as well.
In the early days of the stock market, Graham popularized the idea that most companies were worth more dead than alive, simply because the stock market wasn’t properly evaluating stock based on this formula. Back then, a company was worth more to the public if they would merely fold, liquidate their assets, pay off their costs, and distribute the remainder among their stock holders. Obviously, that’s not good for the business.
So how can crypto companies avoid being worth more dead than alive? Again, greater transparency. It is the responsibility of the leadership to be up front about their asset to cost ratio, and it is up to token buyers to be aware of the result, should all assets be liquidated and costs paid off. Is a company in which you’re investing worth more dead than alive? Perhaps you should invest in a different company.
To date, there are very few crypto companies that prioritize the well-being of their token holders. Far too often, crypto companies see their investors as a honeypot of wealth they can dip their hand into in order to fill their coffers. This must change if the crypto community wishes to be around for any extended period of time.
Regulation is coming. It will winnow out the scammers and it will cause massive corrections in the market. However, regulation doesn’t have to be all bad. If crypto CEOs preemptively prepare and take the difficult steps necessary to “clean the glass” into their world, the entire global economy could benefit.
How are you as a crypto-leader serving your token holders? How could you improve? And how are you as a token-investor holding crypto-leaders accountable? The decisions we make today will significantly impact the future. It is far better to toil through transparency today than face regulation with shame and failure tomorrow.
If you haven’t invested in Bitcoin yet and you want to join the movement, the easiest way to begin is with Coinbase. Get $10 of free Bitcoin when you use this link — it’s my referral link — and get started now!
If you’d like to start using an exchange instead of Coinbase, Binance is a great place to start. Sign up here!
Create your free account to unlock your custom reading experience.