Value Investing and Cryptocurrency

Written by: Zack | zack@randomstock.net

Is value investing possible in the field of cryptocurrency? Several of my friends have made a lot of money in cryptocurrency, but I have always stayed away due to a lack of understanding. I've always believed in the value investors playbook: find an undervalued asset (stock, bond, business, property) and buy it. This paradigm doesn't seem to have a parallel in cryptocurrency despite my best efforts to find one.

How do you establish a value for a coin? This has been my biggest stumbling block. Some businesses which I understand (Petrol, Chemical Manufacturing, Real Estate, etc.) are more straight forward. A look at a business balance sheet can give you a lot of insight on its physical assets, cash-on-hand, intangible assets, as well as any insider trading activity. All this information must be correct under penalty of law.

Where can you find information for cryptocurrencies such as BitCoin? People often point to white papers as a foundation of value for bitcoin and other cryptocurrencies. After reading the bitcoin white pages, I feel the white pages prove the technological advancements of block chain, but fall short of demonstrating the value of bitcoin itself. If the white pages outline of block chain technology denotes bitcoins value, then that implies all other coins created using the same or similar technology should be equal in value, which they're not. They're not even close, the market caps of these crypto's are all over the place

If a company spends X amount of energy to produce a product, does that product automatically carry the value of the energy used to create it? I have heard some say that the value of bitcoin is tied to the energy used to create it. This argument does not seem logical to me, according to this principle, if the energy is produced cheaply via a renewable source , we should see the price of bitcoin and other cryptocurrencies slide. We have not seen the prices slide, we have seen them increase.

I don' think a value based investment can't be made in cryptocurrency. I feel it's a pump-n-dump mechanism for sophisticated players with the means to manipulate markets. Also, when you ask bitcoin investors about the risks involved with bitcoin, they seem to think there are none, which is a red flag. It feels cult-ish, and I'm going stay away. Maybe one day everyone will be laughing at me when bitcoin hits 500k, but I wouldn't count on it.

-Zack