Cryptocurrency prices are highly volatile and are testing investors’ patience more than ever. The move from last November’s all-time highs to today’s 2017 lows has triggered an investor frenzy. If you find yourself in the same situation and wondering what you can do, the answer is to invest in cryptocurrencies.
What is value investing? How can you use it to make investments in cryptocurrencies? Let’s find out in this post. But first, if you haven’t downloaded Mudrex yet, what are you waiting for? Download it now and put your investments on autopilot!
What is Value Investing?
The term “value investing” was made famous in 1949 by the book “The Intelligent Investor” by Benjamin Graham (Columbia University Business School professor and mentor of Warren Buffett).
Value investing is a concept of buying an asset at less than its actual book value (intrinsic value). Value creation occurs when undervalued assets are purchased, which will grow over time and create profit margins.
Think of it as buying a precious ring of 100 rupees for 80 rupees. The 20 rupees makes a difference, because if you sell it in the future, you will get more than you paid for it. If it is a precious ring, it might cost more than 100 rupees; you can do the rest of the calculations yourself.
As Warren Buffett, the Omaha soothsayer, said, “It is much better to buy a great company at a fair price than to buy a reasonable company at a great price.” – This completes the concept of value investing.
What Does Value Investing in Cryptocurrency Mean?
Now that the concept of value investing is clear, let’s turn to the discussion of what value investing in cryptocurrencies means.
To quote again the greatest value investor of all time, Warren Buffett, “Price is what you pay. Value is what you get in return.” The same applies to the cryptocurrency market.
If you invest in cryptocurrencies such as Bitcoin, Ether, Matich, etc., value is generated when you are able to sell at a higher price than you buy. Let’s understand this with an example.
At historic highs, you would certainly have paid more than the actual value of Bitcoin. Now that Bitcoin is approaching $20,000, your money will be wiped out following the trend.
The strategy to avoid this is to invest in the value of the asset rather than its price. This requires fundamental analysis and technical analysis. The former indicates the real value of an asset, while the latter indicates the ideal market price. While old-school value investors believe in fundamental analysis and do not board the technical analysis ship.
Of course, if an asset has no real value, it makes no sense to pay a higher price just because its value is increasing. It would be like buying a 500 crore stock for 500 crore just because the investor is excited about it, without any specific trend or underlying value.
Compared to other assets, cryptocurrency is unique. It is built on a blockchain and is a virtual currency. Cryptocurrencies have no underlying value, which makes it more difficult to determine their real value. This makes investing in the value of cryptocurrencies a difficult, but not impossible, task.
In November 2021, the price of Bitcoin reached its highest point at $64,000, up from nearly $20,000 in 2017. This is a very profitable and attractive rise for anyone, and with this attitude you decide to follow the trend and buy it.
How Can You Evaluate the Value of a Cryptocurrency?
You may have heard of PE (price/earnings), PB (price/book value), etc. These terms are used to evaluate securities so that we know whether they are overvalued or undervalued. Data are available for all these elements, which makes it much easier to implement a value investing strategy.
This is not the case with cryptocurrencies, as they are not fiat currencies but digital currencies. Simply put, they do not have an underlying asset backing them. The Indian rupee, for example, is backed by gold.
However, you can implement value investing in cryptocurrency using these simple steps.
1. Consider the coin’s price history
When investing in digital currencies or tokens, the starting point is to collect and analyze historical price data. For example, if you want to invest in Ethereum (ETH), you need to know how volatile it has been in the past, when it has reached all-time highs and lows, the reasons behind it, and the underlying patterns it shows for the future.
2. Know about major investors
While cryptocurrencies are based on the blockchain and the whole idea was formulated with decentralized ownership in mind. It is necessary to know who owns the majority stake in a given cryptocurrency. For example, much of the value of Ether is owned by co-founder Vitalik Buterin. On a broader level, ethereum is also held in cold storage wallets by cryptocurrency exchanges, including Kraken and Binance. This information is valuable because any change in investor ownership or possession can lead to large price swings. It is best to know how often an investor’s holdings have changed in the past.
3. Look at the team behind the coin
This step involves verifying the trustworthiness of the team involved in creating and managing the cryptocurrency. You need to research the team members, their credentials, their experience, and their connections to other cryptocurrencies or currencies. This will help you get background information. The better known the creators and team are, the better it will be for your investment.
4. Know the crypto’s market cap value
It is like investing in stocks according to their capitalization, large cap, small cap, etc. Remember that the large-cap cryptocurrencies of today are the small-cap cryptocurrencies of yesterday. For example, ethereum, from the ethereum blockchain, was trading at less than $1 in 2016. But today it is trading above $1,000, with a market value of $130,357,854,104 (as of July). It is usually safe to opt for higher market capitalization, but if you do your due diligence you can choose undervalued cryptocurrencies with growth potential-investing in cryptocurrencies.
5. Check the road map, vision & WhitePapers
Typically, when a cryptocurrency is launched, a white paper is published outlining its purpose, vision, and roadmap. Growth projections are also a key element. This stage of the checklist is therefore an important step in understanding the value of a cryptocurrency. Clear facts and figures are a good green flag.
6. Pay attention to news and updates about the coin
This year, one of the top 10 cryptocurrencies, called Luna, lost 99 percent of its valuation, falling from $120 to less than $1. The reason for the fall of this cryptocurrency is that it is directly linked to TerraUSD (UST), a stablecoin associated with the US dollar and the Terra ecosystem itself. There is a fundamental flaw in the operation of the TerraUSD (UST) stablecoin algorithm. This led to Luna’s collapse. Value investors need to be aware of this type of news and updates in order to time their investments for gains or avoid downside risk by closing their positions at the right time.
This is the age of the Internet, and news is more often found on social media platforms such as Twitter, discussion groups, etc. than in traditional media. It is necessary to keep an eye on cryptocurrency influencers, cryptocurrency exchanges, and web pages to stay on top of the news. In addition to following the news or traditional websites, check the official websites and pages of the cryptocurrencies you plan to invest in.
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 investors’ emotions around the asset pool. This phenomenon is directly related to news bias, which means that people tend to let news or recent events cloud their judgment. It is important to be aware of situations like this. The fact that a cryptocurrency or coupon is traded with high volume does not mean that it is actually worth that much. In all likelihood, it is simply overvalued. Avoid these cryptocurrencies because sooner or later the bubble will burst and you may pay the price.
2. Lack of diversification
You may have heard that you should not put all your eggs in one basket. Well, let this be your biblical rule for investing. Always avoid investing heavily in a single cryptocurrency. Broaden your investment horizon and diversify the amount invested in multiple cryptocurrencies. Diversification also applies to investments outside of cryptocurrencies. Add other assets to your portfolio, such as stocks, real estate, etc.
3. Lack of understanding
If you do not understand how cryptocurrencies work or how to make a valuable investment, ask an expert. Participating in an online community or forum can clear up any doubts. Not knowing is more dangerous than knowing nothing about something. As a value investor, you should avoid falling into these 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 that you think will help solve a problem makes a difference, even if it is an investment in cryptocurrency. Bitcoin was invented in this way: to create a peer-to-peer payment mechanism independent of central banks. We know where Bitcoin is now. Therefore, invest in cryptocurrencies that have a clear vision and use case.
2. Consider investing in multiple cryptocurrencies
Diversify your cryptocurrency portfolio by including more cryptocurrencies. Start with 4-5 cryptocurrencies in your portfolio and gradually increase the number according to your knowledge. You can also include NFTs in your portfolio.
3. Don’t neglect the volatile nature of the market
Unlike other markets, the cryptocurrency market is based on volatility. Highs and lows are what attract investors to this space. However, don’t spoil it. The highs are high enough and the lows are low enough. If you manage to make unrealistic gains, the losses will reflect that. Therefore, be diligent in understanding the nature of the cryptocurrency market.
4. DYOR (Do Your Own Research)
There is no alternative to personal research on cryptocurrency investing. Follow cryptocurrency pioneers, websites, social media pages, Reddit accounts, etc., and make every effort to gain in-depth knowledge before making an investment decision.
5. Consider the risks involved
Cryptocurrencies are particularly risky because they are not specifically regulated and the potential for fraud and scams is very high. Determine your risk appetite and take the risks you can afford to take.
6. Beware of scams/frauds
It goes without saying that you need to protect your cryptocurrency wallet from possible fraudulent and scamming activities. Keep your wallet keys safe and never share them with anyone to ensure the safety of your coins.
Value investing is a classic theory in the investment world. With the acceptance and massive investments in cryptocurrencies around the world, value investing in cryptocurrencies has become a mix of classic and modern. Make sure you understand the investment strategy before implementing it. Do your research and ask for help if you need it. Cryptocurrencies are inherently risky; therefore, if your goal is to invest in cryptocurrencies, you must be superstitious and diligent.
1. What is crypto value investing?
Investing in the value of cryptocurrencies means identifying potential undervalued crypto assets with a solid background to grow in the future. Buying at low prices when comparative values are higher makes all the difference for cryptocurrency investors.
2. Is cryptocurrency a good investment in 2022?
This subjective aspect depends on the investor’s personal preferences, goals and risk appetite. If you have done your homework and discovered the value of cryptocurrencies, which can grow exponentially in the future, any time is a good time to invest.
3. What is the purpose of value investing?
The strategy of value investing helps investors find those gems of assets that have great potential value but are still undervalued. Investing early in these assets helps reap profits when their prices rise.
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.