TL;DR
- For assets as volatile as cryptos, it’s always a good idea to do value investing. It is a concept where you buy an asset at a value lower than its intrinsic value.
- Since there is no underlying asset that determines a cryptos intrinsic value, we often use the coin’s price history, investors, team backing the project, whitepaper, news, etc., as a measure.
- Some things you should be mindful of while value investing is falling into the trap of overvaluation, lack of diversification, lack of understanding, FOMO, etc.
- Some tips to follow are identifying coins with real-world use cases, investing in multiple cryptos, DYOR, assessing risk, watching out for scams, etc.
Introduction
Cryptocurrency prices are volatile, now more than ever, testing investors’ patience. From an all-time high in November last year to as low as its 2017 level at present, it has led to an investor frenzy. If you are in the same boat and wondering what you can do, the answer is value investing in cryptocurrency.
What is value investing? How to use it for your investment in cryptocurrency? Let’s find out in this piece. But before that, if you haven’t already downloaded Mudrex, what are you waiting for? Download now and autopilot your investments!
What Is Value Investing?
The term “value investing” became famous in 1949 from the book “The Intelligent Investor,” written by Benjamin Graham (a Columbia Business School professor and mentor of Warren Buffett).
Value investing is a concept where you buy an asset at a value lower than its actual book (intrinsic) value. Value creation occurs when you buy an undervalued asset, which will grow with time and make room for profit.
Think of it as purchasing a precious ring worth Rs. 100 for Rs. 80. The Rs. 20 makes all the difference because if you sell it in the future, you will get a price higher than what you paid. If it is a precious ring, it would probably go beyond Rs. 100; you can do the rest of the math.
As the Oracle of Omaha, Warren Buffett, wisely says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – this wraps up the concept of value investing.
What Does Value Investing in Cryptocurrency Mean?
Now that your concept of value investing is clear, let’s move to what value investing in cryptocurrency means.
Again, quoting the greatest value investor, Warren Buffett, “Price is what you pay. Value is what you get.” This applies in the cryptocurrency market as well.
Whether you invest in cryptos such as Bitcoin, Ether, Matic, etc., the added value is when you can sell them at a price higher than your purchase price. Let’s understand it with an example.
In November 2021, the Bitcoin price was at its highest at $64,000, from nearly $20,000 in 2017. This is a very lucrative and attractive hike for anyone, and with this mindset, you decided to jump into the trend and buy it.
At an all-time high level, you are definitely going to pay prices higher than the value of Bitcoin’s actual worth. Currently, with Bitcoin trending near $20,000, your money would have been washed up for following the trend.
The strategy to avoid such a scenario is to invest in the value of an asset and not the price. This requires fundamental analysis and technical analysis. The former tells you the real value of an asset, and the latter tells you an ideal buying price. Although, old-school value investors only believed in doing a fundamental analysis and not getting on the technical analysis boat.
There is no meaning in paying a higher price for an asset just because it is soaring if it is not worth the actual value, right? It would be like buying a stock worth Rs. 50 at Rs. 500 just because investors are going gaga over it without any concrete development or fundamental value.
Compared to other assets, cryptocurrency is unique. It is built on blockchain and is a virtual currency. There is no underlying asset for cryptos, making it harder to determine their actual worth. This makes value investing in cryptocurrency a challenging task but not an impossible one.
How Can You Evaluate the Value of a Cryptocurrency?
You may have heard about PE ratio (Price to Earning), PB ratio (Price to Book Value), etc., used for valuing stocks to know whether they are over or undervalued. The data are available for these assets, and as a result, executing the value investing strategy is easier.
This is not the case with cryptocurrencies because they are not fiat but digital currencies. In simple words, they do not have any underlying assets to back them up. For instance, the Indian Rupee is backed by Gold.
However, you can implement value investing in cryptocurrency using these simple steps.
1. Consider the coin’s price history
When you invest in a digital currency or token, the base zero is gathering and analyzing historical price data. For example, if you wish to invest in Ether (ETH), you should know how volatile it has been in the past when it hit the all-time high and low, the reasons behind that, and the fundamental pattern it shows for the future.
2. Know about major investors
While cryptocurrencies are based on blockchain, and the entire concept is formulated on decentralizing ownership. You should know who holds the majority of the part in a particular crypto. For example, a considerable value of Ether is held by its co-founder Vitalik Buterin. At a broader level, Ether is also stored in cold storage wallets by crypto exchanges, including Kraken and Binance. Such information is valuable as any change in ownership or investor holding may lead to heavy price fluctuations. It is better to know how frequently the investor ratio has changed in the past.
3. Look at the team behind the coin
This step includes checking how credible the team behind the crypto creation and management is. You should look at the team members, their credentials, experiences, and their association with other cryptos or coins. That will help you get the fundamental information. The more renowned the creators and the team are, the better it is for your investment.
4. Know the crypto’s market cap value
This is the same as investing in stocks as per their market cap, large cap, small cap. etc. Remember that today’s high market cap crypto is yesterday’s small market cap crypto. For example, Ether, of the Ethereum blockchain, was trading below $1 in 2016. But today, it is trading above $1,000 with a market cap of $130,357,854,104 (July). Typically, going with the larger market cap is a safe bet, but if you are performing your due diligence, you can go for undervalued cryptos having the potential to rise–value investing in cryptocurrency.
5. Check the road map, vision & Whitepaper
Generally, a white paper is released with the launch of a cryptocurrency that contains insightful details on the purpose, vision, and road map of the crypto. The growth projection is also a crucial part of it. Thus, having this step on the checklist is an essential step to knowing the value of cryptocurrency. Clear facts and numbers are a good green flag.
6. Pay attention to news and updates about the coin
This year, one of the top ten cryptos called Luna lost 99% of its valuation, dropping to under $1 from $120. The reason behind the fall of this crypto was that it was directly associated with TerraUSD (UST), which is a stablecoin pegged to the dollar and of the same Terra ecosystem. There was a fundamental flaw in the way the algorithmic stablecoin TerraUSD (UST) worked. It led to Luna’s crash. Value investors should know such news and updates to time their investments and gain the benefit or avoid the downside risk by closing the position at the right time.
7. Pay attention to news and social media
It is the era of the internet, and news trends more on social media platforms like Twitter, close chat groups, and more compared to traditional means. You should follow the crypto influencers, crypto exchanges, and pages to stay on your game. Also, check the official website and page of the crypto you are planning to invest in, in addition to following traditional news agencies or websites.
What are Some Common Traps for Value Investors in Cryptocurrency?
Sometimes, knowing what not to do is more important than knowing what to do. Here is what you should avoid for making while considering to do value investing in cryptocurrency.
1. Be mindful of overvaluation
Overvaluation is the result of investor sentiments sailing the boat of an asset but in a swimming pool. This phenomenon is directly linked to recency bias, which implies that people tend to cloud their judgment because of a recent news piece or event. Be aware of such a situation. Just because a crypto or a token is trading high, it doesn’t mean that it is actually worth that. It probably is just overvalued. Avoid such cryptos, as sooner or later, the bubble will burst, and you may take a toll on it.
2. Lack of diversification
You must have heard about never putting all your eggs in one basket. Well, make this your bible rule for investment. Always avoid investing heavily in a single crypto. Spread your investment horizon and divide the investment amount among multiple cryptos. Also, diversification applies to investing beyond crypto. Add other assets, such as equity, real estate, etc., to your portfolio.
3. Lack of understanding
If you do not understand the concept of how cryptos work or how to include value investing in it, ask an expert. Join an online community or a forum that can clear your doubts. Not knowing is less dangerous than having half understanding of something. As a value investor, avoid falling into such traps and educate yourself.
4. Avoid FOMO
FOMO, aka Fear of Missing Out, is a reason that traps individuals from becoming crypto investors or traders. FOMO is not enough to enter the crypto market, let alone trade in it.
What are Some Tips for Value Investing in Cryptocurrency?
These tips will help you get a final push to implement value investing in cryptocurrency.
1. Look for coins with real-world use cases
Investing in something you believe will be helpful to solve a problem makes all the difference, even for crypto investments. Bitcoin was invented in this way– to make a peer-to-peer payment mechanism independent of the central banks. We know where bitcoin stands currently. Thus, invest in cryptos that have a clear vision and use cases.
2. Consider investing in multiple cryptocurrencies
Diversify your crypto investment portfolio to include multiple cryptocurrencies. Start with 4-5 cryptos in your portfolio, and based on your knowledge, increase the number gradually. You can also include NFTs too in your portfolio.
3. Don’t neglect the volatile nature of the market
Unlike other markets, the crypto market is based on volatility. The highs and lows are the elements that attract investors to enter this arena. However, do not undermine this. The highs are pretty high, and so are the lows. If you can gain unrealistic gains, the losses will reflect the same. Thus, be diligent with the nature of the crypto market.
4. DYOR (Do Your Own Research)
There are no alternatives to conducting your own research for crypto investments. Follow crypto thought leaders, websites, social media pages, Reddit accounts, etc., and do whatever in your power to gain a thorough understanding before making an investment decision.
5. Consider the risks involved
Cryptos are a highly risky asset because they lack concrete regulations, and the chances of fraud and scams are very high. Decide your risk appetite and take risks that you can afford.
6. Beware of scams/frauds
This goes without saying that you have to protect your crypto wallet from possible scams and fraudulent activities. Keep your wallet keys safe and never share them with anyone to ensure the safety of your coins.
Conclusion
Value investing is a classic theory in the investment world. With cryptos being accepted and invested heavily across the globe, value investing in cryptocurrency has also become a hybrid mixture of classic and modern. Make sure that you understand an investment strategy before you execute it. Do your own research and ask for help if required. Cryptocurrencies are risky in nature; thus, you have to be proactive and diligent if investing in them is your target.
FAQs
1. What is crypto value investing?
Value investing in cryptocurrency refers to identifying potential cryptos that are undervalued and have a solid fundamental background to grow in the future. Buying at a low makes all the difference for crypto investors when the comparative value is high.
2. Is cryptocurrency a good investment in 2022?
This subjective question depends on the investors’ individual preferences, goals, and risk appetite. If you have done your homework and have found value in crypto, which can grow exponentially in the future, any time is a good time to invest.
3. What is the purpose of value investing?
Value investing strategy helps investors find the gems of assets that have great potential value but is underrated yet. Investing early in such assets helps in gaining profits when the price rises.
4. Does the value investing strategy still work?
Yes, the value investing strategy still holds its ground, so much so that digital assets such as the cryptocurrency market have also started to implement it.
