The Crypto Factor

Seasoned financial markets commentator Matteo Leibowitz explains the attraction behind investing in digital currency and how to avoid first-time buyer pitfalls

Once, ever-so-briefly, the darling of the market, today cryptocurrencies wallow aimlessly in the trough of charts. But, remember, as everyone’s favourite financial guru, Warren Buffett, once aphorised, “be fearful when others are greedy, and greedy when others are fearful.”

So let’s, for a moment, put on our greedy hats and imagine, for a moment, that we might want to buy some cryptocurrencies as an investment.

There are two main questions to consider: which ones should I buy, and once I’ve decided which ones I should buy, how do I go about buying them?

The second question is relatively straightforward.

Cryptocurrencies can be purchased online through consumer friendly platforms like Coinbase. Simply sign up for an account, plug in your credit card details, select your asset of choice and decide what amount you wish to buy. If you decide to pursue a Dollar Cost Averaging strategy, Coinbase allows you to set up repeat purchases on a daily, weekly, bi-weekly, and monthly basis.

A more sophisticated investor may choose to use an exchange, like Coinbase’s ‘Pro’ offering. Users can observe real-time order books and choose between market, limit, and stop-loss orders. In addition to presenting greater flexibility around order structure, Coinbase Pro also saves users on fees, with makers charged zero percent and takers charged 0.25 percent on each purchase. By contrast, Coinbase’s retail-focused product executes orders at current market prices and charges up to four percent on each purchase, depending on your jurisdiction.

Taking the plunge
Once you finally take the plunge and purchase your very own cryptocurrency, you probably want to think about how you are going to store these bearer assets.

The easiest option is to simply leave them on a platform like Coinbase, but be aware that this comes with counterparty risk: if Coinbase suffers a hack, or decides that they are unhappy with you as a customer, both of which are, unfortunately, par for the course in the cryptocurrency world, they might be unable, or refuse, to honour your request to withdraw or sell your coins. Alternative, self-sovereign custody solutions range from hot wallets like Blockchain.com to hardware wallets like LedgerX.

But hold on a second — back to the first question: which cryptocurrencies are even worth your time and money?

Unfortunately, there is no trivial answer to this question. Indeed, if there was, or is, I implore you to share it with me.

How much to invest of your time and money?

There are, however, several important factors to consider that may help you make a more profitable investment decision.

First off, you want to define your investment thesis. Is this a medium-to-long term investment, or a short-term market play? If the latter, then it may not be necessary to diligently evaluate the fundamental merits of your cryptocurrency of choice — rather, you want to select the asset that you think will perform best in the near future. Applying technical analysis, which leverages metrics like trading volume, trend lines, moving averages, long/short ratios, and over/underbought signals, can help you tease out local tops and bottoms.

If you wish to avoid the stress associated with day-trading a 24/7/365 market then it’s worth applying a qualitative, ‘Venture Capital’-driven approach, whereby you construct and apply a framework to assess the fundamental strengths and weaknesses of a project.

We are still in the early life cycle of the cryptocurrency markets, and so any project is more analogous to a start-up than it is to a mature, private or public equity opportunity. Indeed, as currencies, crypto assets are not cash-flow generating, and thus cannot be evaluated on a Discounted Cash Flow basis. Moreover, despite desperate efforts, analysts in the cryptocurrency sector have yet to agree upon a single, dominant valuation model or fundamental metric. Like start-ups, cryptocurrencies are also inherently risky, and so any investment decision in this market should also be accompanied with a healthy expectation of failure.

Questions to consider
But, nevertheless, there are a handful of qualitative qualities to consider. In no particular order: How strong is the development team? Do they have broad experience over the cryptocurrencies’ intersectional domains, from distributed systems, to economics, to game theory? Do they have successful experience in bringing a product to market? How impressive is the underlying blockchain? How secure is the underlying blockchain, and does its monetary

policy ensure that it will remain secure in the future? Can it scale to a point where it can viably support mainstream adoption? Does it have network effects and a distinct, attractive brand? As an ostensibly decentralised form of money, who gets to make decisions when it comes to feature upgrades and integrations? What features separate it from competing currencies, and how will it maintain its competitive moats? Is it supported by exchanges, which provide avenues for liquidity?

To the casual observer, these questions may seem overwhelming, and admittedly, they are. There’s no such thing as a free lunch, and, similarly, it’s no easy feat to determine which currencies will capture value over the long term. Of course, if it were straightforward, there wouldn’t be much upside left — the market would already price assets at their fair value.

But if you believe that there is a future in cryptocurrencies, and you believe there remains significant room for the market to grow, it might just be worth your time to leaf through some reading material and start trying to answer some of the above questions. If you’re lucky, or you’re smart, or you’re some combination of the two, pursuing this venture-type investing approach may produce venture-type returns. At the very least, you might just learn something new.