I think that it’s time that I address my views on cryptocurrency as a value investor. I have seen a lot of argument as to whether cryptocurrency deserves a place in a value investors portfolio or not. I want to take another tack than the customary first question, “Are we capable of understanding the business?”. I am not sure that anyone can 100% understand cryptocurrency, especially the vast number of altcoins in existence, but I am willing to stipulate for a moment that it passes that first check to delve further into crypto as an investment platform.

The first question I ask myself whenever I am looking at any investment that is new (and yes I do invest in new things, I even invest in startups but that is a topic for another post) is what is the angle to be played here. New challenges to the status quo of an established sector have to present some angle that was not provided previously to survive in the cutthroat world of business. The large eat the small or eat everything the small would eat and leave nothing for them causing them to die. Therefore, the small have to find something to eat that the large don’t even know about or have written off to thrive and grow.

So, what is cryptocurrencies angle? I have spent a good deal of time investigating cryptocurrency as a whole and both stale and alt coins individually through articles, white papers and podcasts to numerous to mention all by name here. I will mention a few and say that if you are truly interested there are a number of charlatans out there as well as legitimate sources and some that toe the line. However, if you take everything you read or watch with a grain of salt there is a lot of information you can get in between the paid for opinions.

I always start my investigations in the same place, Investopedia. Why? Because they offer a vast library of basic knowledge to get anyone who is looking on the right foot to start. It may not be the most nuanced explanations for everything, but it should get you in the right ballpark to explore it further and in many cases carries additional articles that go further in depth.

If you are looking for further resources on specific coins, there are white papers for virtually every coin on the market. There are impostors out there so please beware, but the community outs impostors pretty quickly so if with a little searching you don’t find them being outed it’s likely okay. The word scam is thrown about a lot so don’t zero in on it as much as you would with regular businesses. This is a world where everyone has their own agenda and just like short sellers there are people who will maliciously use that word to drive prices in a certain direction. Yes, you can short cryptocurrency.

Look for articles in the mainstream business media about these coins, it’s still fairly new and misunderstood, but I have found some well-reasoned and researched articles amongst the standard business pundits. That being said, Jim Cramer will likely never give it a buy on Mad Money and you won’t see Warren Buffett digging into his war chest to invest in crypto, but the articles are out there.

Lastly, YouTube has huge crypto currency community. I don’t want to say any particular channel is legitimate or better than any other because I still am not knowledgeable about the difference between clickbait and legitimate insight yet. I have those I like to listen to and some of them are paid for their commentary on certain coins, but the best ones will tell you that in the video, and that does not preclude them from having some legitimate insight into the world of cryptocurrency if you read between the paid props and legit commentary.

Okay, with that out of the way, we have to first look into some distinctions between currencies, and my opinion versus what you might read in some of the listed resources. There are two large groups of cryptocurrency, most often represented at Bitcoin and Altcoins. However, I like the distinction between stable coins and alt coins. I feel the time of Bitcoin and everyone else is too simplistic and not completely accurate, I’ll explain further.

I think most people immediately equate cryptocurrency with Bitcoin and it certainly has a massive following and legitimacy as the first market mover. It currently is trading above $10,000 per bitcoin. This is not the highest or the lowest it has been, but overwhelms the prices of all other coins by orders of magnitude. Bitcoin started the revolution with it’s reclusive and anonymous creator(s) Satoshi Nakamoto back in 2009. It has become synonymous with the world of crypto and not without good reason. After all, we usually use Kleenex, not facial tissues, no matter the actual brand right?

However how much does any industry stay the same over the period of a decade? Not often right? Well it’s the same in the world of cryptocurrency. Since the inception of the movement and rocket launch that was Bitcoin there have been literally thousands of other coins created. Heck creating a coin isn’t even hard and making it profitable is more a matter of marketing than value. This is the first hurdle for the cryptocurrency to overcome to become a part of a value investors portfolio. They often have no intrinsic value of any sort or even a competitive advantage to provide some sort of future value. Let’s save that fact until later though.

In the past decade we have seen the birth and explosion of many other coins, and a few have elevated themselves to the point where they are seen by some if not many in the crypto world as what we would call stable coins. This is crytpo that is backed by assets in some manner, the manner of assets backing them is as different as the coins themselves and vary in their stability, but overall there is a sector of coins that fall into this description. Some of these I agree deserve mention, the first is Tether, like it or not it is the top of the stable coin pack. There are some concerns over the lack of audit data while it continues to grow “value”. US dollar coin(USDC) and TrueUSD (TUSD) maintain a very stable 1 to 1 ratio along with Gemini (GUSD) and various others, these are backed mostly by physical US dollars.

I would like to add a category for consideration apart from bitcoin, altcoin, stablecoin argument. This is what I refer to as legitimate competitors. I refer in this to coins such as Ethereum, Litecoin, Bitcoin Cash, XRP, Chainlink and there are a small group of others. Most of these coins are proof of work and not backed by fiat or stable assets themselves but are starting to be backed by organizations at their face value providing a sort of stability. There are some problems with this but I believe it is an evolution of the cryptocurrency world entering the public consciousness that will eventually be ironed out.

Why are these competitors and others not? Many of these are finding work by utilizing their base or blockchain for additional purposes that will set value to them. Some of are being integrated by the large financial institutions to send and receive data instantaneously since they move assets instantaneously and once sent cannot be copied or called back. This provides an additional layer of security but leaves many in the crypto world concerned about the point of crypto currency in the first place which was to make a market free of the machinations of governments and Wall Street. However, it does provide a sort of value to the coin by providing a purpose and use for it other than existing and being traded.

Does everyone remember the Tulip Mania? It was a period in history where tulip bulbs almost crashed the world market and the bulbs never changed hands. The bulbs were traded via contracts and the price moved essentially on the speculation of investors trading something that to them wasn’t even real. These investors didn’t ever plan to handle tulip bulbs, but because there was perceived value the price hit the stratosphere. This is what is sometimes in the crypto world called a moonshot and we can learn much from looking back on this piece of financial history.

So, you say Daddicus, I thought you were going to discuss whether or not cryptocurrency was a legitimate investment for value investors. I will say there is the possibility to make ridiculous amounts of money in the cryptocurrency world, but much like the Tulip Mania these opportunities are short and don’t have a legitimate reason that they happen. It is extremely easy to believe you are investing in a coin making a moonshot and end up having bought at the top and it crashes so fast that you end up with massive losses.

Also, the entire point of cryptocurrency was to create a commodity like gold that had it’s value not tied intrinsically to the stock market or movement of fiat currencies. However, if we look at the trading history or the more stable coins, not to be necessarily confused with stablecoin, this just has not materialized yet. If I had a nickel for every time I have heard in only the past six months that Bitcoin was heading up and going to make and break $20,000 I could have paid at LEAST one month of my mortgage on it alone.

The fact is that while it does have rises and falls which can be very dramatic, it tends to follow the overall health of the market. It doesn’t even move in the inverse like gold does. When the market is doing poorly people are not buying bitcoin. Look for yourself, but other than a few events such as halvenings, which are man made constructs in a fashion, the crypto market generally works extremely like the market as a whole. During corrections prices fall, as news comes out about a particular coin that is positive or negative it moves the coin for short periods before coming back to a normal range.

That is why I cannot as a value investor recommend investing in it as anything other a risky business part of your portfolio. Will bitcoin make it to $300,000 a coin in the future like has been theorized by some very legitimate cryptocurrency investors? Maybe. Time is the only thing that will tell, bitcoin is a resource that is getting scarcer as time goes by, will it ever have widespread acceptance as a form of currency or fiat itself? Who knows? Therein lies the problem.

Any investment that is not backed by a good, service or commodity has very little place for a value investor to rationalize investing in it. We invest for the long term and some would argue that is what they are doing with bitcoin or Ethereum or Litecoin or XRP. Some even have some sort of argument as service agreements are reached, however on a whole there is no way to tell that any of these coins will still be around ten years from now and no way to determine whether we have ANY margin of safety much less a large margin of safety. The bitcoin you own today could be worth $100,000 or $1,000 in ten years and we have no way to reasonably predict it.

Do I believe that there is a future use or market for cryptocurrencies as a whole? Yes I do. Would I stake ¼ of my portfolio on any particular coin? Not a chance! I always would like to be sure enough of any company I buy that I would be willing to put ¼ of my net worth be it $1,000 or $100,000 on that company or commodity. That’s a pretty high bar to set, but it will save you a lot of trouble and concern about the movement of the market if you have done the research to be that sure of your choices.

I hope this has provided some food for thought, and there may be some disagreement or a lot of disagreement, I don’t know how you all view the subject. This is just my opinion as I have put a lot of research and forethought into this asset class. I do plan to continue my research into the class as a whole and of course will review any news that comes to my attention about individual coins as it becomes available. This is just where I see the state of the market currently, and I do check it on at least a daily basis to track it.

I welcome your feedback as well if you have a strong opinion or simply wish to discuss it. I will say I don’t think I truly could answer yes to the 1^st question, but it doesn’t stop me from trying as I find it interesting on a personal level. As a professional investor I think we often need to say that things are too complicated or us to understand and put them to the side, however we will always have some class that fascinates us and we will continue to study it, not knowing whether it will ever fall into our circle of competence or not. I’m also a historian and there are a ton of topics I think are too hard for me, but it doesn’t stop me from exploring them. So, push your boundaries and look for something you may not understand but fascinates you and learn what you can. In the future if it impacts your legitimate investing you can put it to the side for a period but keep working to gain competence. You never know when the breakthrough moment will be and when you have it, come back and tell me which coin is the legitimate long-term investment. I hold no preconceptions that would stop me from listening.

So go crunch some numbers or code or read! I’ll be hunting up some new investments to feast on, till next time.

-Daddicus Rex