As of late, I pondered how the cryptocurrency market runs, and how the traders drive the market. I contrasted it with the outlook of traders in the stock/securities market and acknowledged its differences, nevertheless, the main distinction is that individuals in the traditional market trust in the development of the company while we assemble to trust in the code, the technology of the projects we invest in. Geek money much?
The Intelligent Investor is one of the must reads as Warren Buffett the billionaire and owner of Berkshire Hathaway himself suggests. The book is studied and revised by professionals who have accumulated information over the past decades. Here’s my research on The Intelligent Investor, a deep dive into its theories and how the cryptocurrency market traders can learn from it.
The Correct Mindset
An investor while investing should be aware of the possibilities and should be prepared for the outcomings both financially and psychologically. The risks involved in trading assets be it stocks, bonds or cryptos leads to speculative attitudes and activities. It is extremely absurd to think that the general public can make money out of market forecasts, technical analysis or price speculations. No one really knows when the bull run comes in or when the bear trap is near, it’s all about investing with the right attitude and a mindset that shows you how to make bucks.
Benjamin Graham talks about the most realistic distinction between the investor and the speculator and how there’s a difference in their attitude towards the market movements. He states:
“The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.”
In short, a speculator earns from the market fluctuations while an investor earns from the real value of the project. Here’s where you take a pause to think what you are, a mere speculator or an investor?
One of the issues the cryptocurrency market experiences is the volatility of digital assets. How quickly the coins/tokens pump and dump. This is one of the major reasons why stock market investors are sceptical while investing in cryptocurrencies, due to its ever-changing or rather fluctuating prices.
In the book, Graham indicates to ‘Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop’. But what can the crypto market investors really do considering the quick highs and lows of the market?
Nothing. But follow what the mathematics defines an envelope of values; by using the Highest High or the Lowest Low of the Last ‘n’ Periods.
For example, if we read the 3-month chart of a crypto, let’s just say Bitcoin [BTC] and the lowest low is $3200 while the highest high is $4200 and the current price is $3600. And a crash of let’s just say $300 takes place in an hour, BTC drops to the trading price of $3300. What am I going to really do? Absolutely nothing! It hasn’t left the support level, it didn’t break the $3200 margin. It just experienced a heavy crash due to a number of reasons such as an institutional investor shifting or selling a part of its BTC for XYZ reasons. Or a whale selling its BTC to buy-back at a much lower price of $3300 than its earlier trading price of $3600.
At this point, an intelligent investor will realise the quake and not panic sell BTC because other institutional investors will look at the price drop as an opportunity to buy more BTCs which eventually will get in a large volume of buying BTCs leading to a rise in price in near future.
At this moment, one should analyse market trends to get an idea of the current capital flow in the market. And if the money flowing in is larger than the money flowing out.
Benjamin Graham metaphorically talks about Mr Market in his books. He asks the reader to imagine that he is one of the two owners of a business and the other partner is known as Mr Market. He asks his audience to assume that Mr Market frequently offers to sell his share of the company or offers to buy the reader’s share instead.
One of Graham’s most powerful insights is this: “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.” So, what does Graham mean by those words “basic advantage”? He means that the intelligent individual investor has the full freedom to choose whether or not to follow Mr Market. Basically, you have the luxury of being able to think for yourself. You can either let the market decide what next has to be done with your business [your holdings] or you can decide what works the best for your business.
The practical implication of the theories to the current crypto market
The Intelligent Investor’s Chapter – 14 Stock Selection for a Defensive Investor
This chapter marks the listing of 7 criteria suggested for the selection of specific common stocks such as:-
1) Adequate Size of the Enterprise
2) A Sufficiently Strong Financial Condition
3) Earnings Stability
4) Dividend Record
5) Earnings Growth
6) Moderate Price/Earnings Ratio
7) Moderate Ratio of Price to Assets
I analysed these conditions and prepared a few criterias that we crypto investors should check out before investing in crypto-related projects/ICOs.
1) Founding date and information regarding the team:
The first thing to investigate is the commencement date and the vision the company built during its establishment. Along with which the information of the founders and team members such as where they have worked earlier and what do they specialise in, is necessary. This helps us to know the project or company we are investing in isn’t going to just take our money, ditch their website and go e-dead.
A whitepaper is an instrument that encourages business to account for themselves to individuals. The whitepaper covers a spectrum of various dealings such as the vision of the project, technical knowledge, market problems, business information, prospects, core team and their track records. A full fledge whitepaper looks as good and detailed as Bitcoin [BTC] and Ethereum [ETH] Whitepapers.
3) Timeline of updates
The timeline of updates provided gives an idea of the features that are yet to be integrated with the system of the particular ICO/project. It is a Byzantine of upgrades and has to be monitored throughout the journey of business. Although a few updates can be brought in earlier than expected while some might be postponed for a while, which is normal due to the unpredictability of the market.
4) Quarterly goals
A deeper dive into the quarterly goals of the project. Its Q1, Q1, Q3 and Q4 objectives are a compulsion and to track if the company has achieved what it aimed, is the duty of an investor. The quarterly goals keep varying as time passes by and gives a hint about the company’s losses and gains.
5) Token supply/sales
Right from token launch to sales, an investor should track all the vital dates of events that are related to its tokens. At all times, an idea of what the project plans for its token developments [token migration\blockchain upgrade] should be conveyed to its users through email updates/social media.
6) Listing on exchanges
Crypto projects have a pre-planned strategy to get listed on exchanges. Some mention their targeted exchange while some don’t. An ideal roadmap gives a hint of when the company will look into getting listed on exchanges. To avoid price manipulation projects may not disclose the particular exchanges they are partnering but definitely do provide a list of exchanges they are aiming for listing purposes.
When utilizing a theoretical examination on a crypto resource [effectively recorded coins], individuals regularly allude to the past developments accomplished and when the following one will undoubtedly occur.
For instance, if a noteworthy advancement is going to occur, supposedly a technical update has to be released. The update is expected to highlight features that were not prevalent in the past version(s). The update is anticipated to take the system or the business in a more advanced stage. An investor at all times should keep the track of these updates as they affect the prices of the tokens/coins. Besides these points, the most important thing is the execution. How long the company takes to execute its planned strategy and gets its technology working for utilising its tokens.
“The whole structure of stock-market quotations contains a built-in contradiction. The better a company’s record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value—i.e., the more this “value” will depend on the changing moods and measurements of the stock market. Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This really means that, in a very real sense, the better the quality of common stock, the more speculative it is likely to be—at least as compared with the unspectacular middle-grade issues.”-The Intelligent Investor
Similarly, the better a crypto company’s records and prospects, the higher the value of the crypto will be to its initial release value or book value. The higher the value of the crypto the more open it is to the vulnerabilities of a speculative market. This brings us to the conclusion that the better the project, the more speculative its prices are expected to be.
When Mr Market gives you lemons, make lemonade!
One of the brilliant takeaways from the book is about how an investor can make use of the bear market for future earnings. Graham teaches that an investor should buy when Mr Market is yelling “sell,”. It sets the time where you need to use the lemons for lemonade.
The cryptocurrency market is currently experiencing its longest winter, it seems like the bear market has taken over and bulls have gone too far to return. This is the span where Bitcoin maximalists are drowning with ‘When $50K?” questions all over social media, the pessimists are propagating how the bubble has burst, traders are hibernating while intelligent investors are buying cheap from all the traders that panic sold BTC earlier this year.
For those who look at the cryptocurrency market from the point of a trader will no more see value in the investment of the digital assets but to be honest, the investors have already realised the value of the market and are heavily investing in it to gain what others have lost.
To give an analogy from the book:-
Ask yourself “Did I call a real-estate agent to check the market price of my house at 1:24 P.M.? Did I call back at 1:37 P.M.? If I had, would the price have changed? If it did, would I have rushed to sell my house? By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?
If you treat real estate as an asset, you need to treat cryptos as digital ‘ASSETS’. They act as a store of value and must be at all times used as one.
The way we as investors look at the current crypto market is pretty pessimistic. Imagine if Bitcoin falls from its current trading price to $4050 to $3500. What are we going to do? How do we look at this?
In the current market, exchanges will receive a lot of sell orders. People are going to stop buying and start selling which in short will result in an oversold market.
But instead, imagine a scenario where BTC drops and everybody loses their minds. Like people become crazy about the Drop A.K.A. Sale. Take this as if Bitcoin went on a sale!
Imagine exchanges putting out tweets reading: “SALE! 15% OFF! on the trading price of BTC” While you view this, Brian Kelly from CNBC goes live on YouTube with intro music Eye of the Tiger by Survivor playing in the background. With this the show starts, “Cryptocurrencies became more attractive yet again today, as the BTC dropped another 15% on heavy volume—the third day in a row that cryptos have gotten cheaper. The blockchain is experiencing high buy pressures…”
What a different world would we be in if only we looked at cryptocurrencies as stores of value, as estates and not as quick money-making unregulated vehicles? The attitude makes all the difference, doesn’t it?
Disclaimer:- This article is independent of the principles established by Benjamin Graham for The Intelligent Investor. The article does not necessarily represent the views and opinions of The First Block. Please note this is not a piece of investment advice.