On one hand, they don’t have much value by themselves. On the other, they are extremely popular.
New cryptos are launched every week. Each claiming to solve some problem or another. Despite all the hype, people can go on with their lives just fine without understanding a word about cryptos.
But for a crypto enthusiast, people’s ignorance about the potential uses of cryptos is not a reason to dismiss its importance.
In fact, they would argue for more awareness. They would say cryptos are the future of money itself, as we know it. Thus everyone should learn as much as possible about cryptos.
In financial markets, supporters of cryptos seem to be winning the argument. This asset class is gaining greater acceptance by the day.
Only time will tell how widely cryptos will be traded and used in the future.
But there is one set of investors who just don’t seem to understand cryptos: Value Investors.
Bitcoin and Value Investors
Bitcoin is by far the biggest cryptocurrency.
It’s 40% of the total crypto marketcap. It’s also twice as big as the second biggest crypto, ethereum, and more than 10 times bigger than the third biggest crypto, Binance coin.
Crypto enthusiasts are drawn to the smaller, newer coins. That’s where the action is after all.
But for most people, cryptos are synonymous with bitcoin. This is despite the fact that over the last 12 years, its marketcap dominance has fallen from 100% to 40%.
Think of it as a first mover’s advantage. The first mover, in this case, has made such a huge impression on the financial world, that it’s impossible to think about other cryptos in the same way.
Indeed, this is the perception of value investors.
Most value investors around the world treat bitcoin purely as a speculative asset. And if the most dominant crypto is speculative then what’s the need to look at the others?
When cryptos first came into the public consciousness, value investors were just as confused as everyone else. They didn’t understand cryptos because no one did.
But things changed over time.
Some investors embraced bitcoin over the years. Initially, they may have done it for quick profits. But now, many investors are seriously considering holding on to bitcoin for the long term.
That’s a big change in perception.
Many investors now know at least the basics of cryptos and are willing to put in the time to understand this new asset class at a deeper level.
But not value investors.
Not only do they not care about all the other cryptos in the market, but they also seem to hate the biggest one, bitcoin.
The most prominent critic is none other than Warren Buffett’s business partner, Charlie Munger. He has made several critical comments about bitcoin.
Munger hates bitcoin mainly due to the anonymity it provides to criminal elements. He believes bitcoin encourages anti-social behaviour. He also seems to believe bitcoin has no value at all.
Only time will tell what value bitcoin will provide the world.
However, if you were to listen to value investors talking about bitcoin, you will notice two things.
First, they really don’t understand what bitcoin (or any other crypto) is or what it can be. In other words, they are not experts on this topic.
Second, they are not interested in understanding bitcoin. Some value investors have no opinion at all about any crypto.
Why is this?
Well, the answers will vary from one value investor to another. But there are similarities.
Here are some reasons we think value investors hate bitcoin (or any other crypto).
# It’s an alien asset class to them
Value investors live in a world of hard numbers. Cold facts matter to them and not much else.
They do a fundamental analysis of companies unemotionally. It has to be that way. Emotions have no place in value investing.
If a stock is undervalued, then a value investor’s feelings cannot get in the way of buying the stock at the right price.
The same is true for selling a stock. If there is no margin of safety in the stock, it should be sold. No emotions are to be entertained.
Bitcoin cannot be analysed in this way. It’s a currency after all. It’s not a stock. Buying bitcoin does not give anyone ownership over bitcoin.
Just like gold, bitcoin does not generate any cash flow. Thus, it can’t be valued in the traditional way of discounting future cash flows.
# It’s an alternative to national currencies
Bitcoin and other cryptos operate as alternatives to national currencies. Successful value investing depends on a stable national currency.
You can see the problem here…
Let’s say a value investor expects a stock to go up 50% in 2 years. He is assuming the currency used to buy the stock won’t lose much value in terms of goods and services it can buy in those 2 years.
If that currency falls 10% in value over 2 years, the value investor has made only 40% instead of 50%.
And it gets worse the longer he holds.
If the currency is losing value over time, then the value investor is running on an economic treadmill. Its speed is the rate at which the currency declines. He has to overcome this speed to make profits.
Bitcoin acts as a currency which other currencies can be compared to. Despite the huge volatility, it has done very well against the dollar in the long term. More and more people are thinking of bitcoin in this way, as an alternative to the dollar.
This is bad news for value investors who are expecting returns in dollars.
# It’s too volatile
Value investors like volatility when they want to buy or sell. They want stocks to fall sharply when they want to buy and rise sharply when they want to sell.
But they don’t really like volatility otherwise. They may not mind a correction if they want to add to their holdings. However, if given a choice, they would prefer stocks that don’t jump around too much.
Bitcoin is just far too volatile for their liking.
# They are victims of their own success
Value investing demands patience. Most value investors make huge profits only in the long term.
The way compounding works, most of the profits come towards the end of the holding period. Warren Buffett was a billionaire in his 50s. But his net worth has multiplied more than 100 times since then.
This means most successful value investors you hear about are old. Charlie Munger is a case in point.
The old adage rings true, ‘You can’t teach an old dog new tricks’.
Making money from cryptos demands a whole new way of thinking. Successful value investors may be too old to change their way of thinking that made them so successful in the first place.
Why should they change what has worked for them?
These factors or a combination of them, could explain why value investors hate bitcoin.
They don’t understand it. They don’t want to understand it. They know it’s an alternative currency to the one they use to buy stocks. It’s too volatile for their liking. And they don’t want to change what has worked for them over decades.
To truly understand something, you need to approach it from many angles. Bitcoin and cryptos are no different. Value investors provide a valuable perspective on this new asset class.
But you are thinking of investing in cryptos, you will have to learn from many other sources too.
This article is syndicated from Equitymaster.com
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