When applying value investing principles to crypto investments, ask yourself these four critical questions before making any decisions:
- Is this project a standout in a promising sector? (Buying crypto = buying the project)
- Have I truly understood this project? (Staying within your circle of competence)
- Does my purchase price include a safety margin? (Margin of safety)
- Am I leveraging the market or being manipulated by it? (Mr. Market)
These questions combat ignorance (1,3) and human bias (2,4)—the only two reasons investors suffer major losses.
The Misunderstood Concept of "Value Investing" in Crypto
Phrases like "HODLing is value investing" or "Bitcoin is value investing; altcoins aren’t" reflect widespread misconceptions. Even the quip "Bull markets don’t care about value investing" reveals a shallow understanding of the term.
The Four Pillars of Value Investing
- Buy Stocks = Buy Companies
Crypto assets derive value from their underlying projects’ ability to generate cash flow. Intrinsic value is the discounted sum of future cash flows.
Example: Bitcoin, as digital gold, doesn’t produce cash flow—a reason Warren Buffett avoids it—but productive crypto projects (e.g., DeFi protocols) might. - Circle of Competence
Invest only where your knowledge exceeds 90% of market participants. If you can’t explain a project’s mechanics or competitive edge, it’s outside your circle. - Margin of Safety
Buy below intrinsic value. In crypto, use relative valuation (e.g., comparing a DEX’s TVL-to-market-cap ratio to competitors’) to identify "obvious" undervaluation. - Mr. Market
Treat market prices as quotes, not truth. Volatility is irrationality to exploit—not a guide—as Ben Graham’s parable teaches.
Applying Value Investing to Crypto Projects
1. "Buy Crypto = Buy Projects" Criteria
- Tokenomics: The token must capture project value (e.g., Ethereum’s gas fees vs. wallets with non-revenue tokens).
- Sector Potential: Prioritize enduring sectors like lending/DEXs over niche tools (e.g., mixers).
- Execution: Early entrants (e.g., BurgerSwap) often lose to better-executed rivals (PancakeSwap).
2. Assessing Competence
- Benchmark: Know more than 90% of investors; anticipate all key arguments about the project.
- Expansion: Continuously learn to widen your circle (e.g., master staking mechanics or Layer-2 scaling).
3. Calculating Safety Margins
- Relative Valuation: Compare metrics like P/S ratios across similar projects.
- Case Study: Venus Protocol’s 2021 undervaluation was identifiable via cross-chain comparisons.
4. Leveraging Mr. Market
- Action: Buy when panic depresses prices below intrinsic value; sell when euphoria inflates them.
👉 Discover undervalued crypto gems
Why Value Investing Works in Crypto
Markets eventually correct mispricing. Rational buyers overwhelm irrational sellers, driving prices toward fair value. This self-correcting mechanism ensures long-term profit for disciplined investors.
FAQ: Value Investing in Crypto
Q: Can meme coins be "value investments"?
A: No—their lack of cash flow or utility violates Pillar 1.
Q: How to estimate intrinsic value for DeFi projects?
A: Use TVL/revenue multiples or protocol-owned liquidity as proxies.
Q: Is timing the market incompatible with value investing?
A: Yes—value investing ignores short-term price movements, focusing on long-term fundamentals.
Final Note
While value investing isn’t the only profitable strategy, it offers a replicable, risk-managed path to wealth. Other approaches (e.g., day trading) require skills/luck beyond most investors’ circles.