Blockchain, Bitcoin, and non-fungible tokens (NFTs), oh my!
Still trying to get your head around the growing list of currency options? You’re not alone. Despite all the talk about cryptocurrency online and in the news, only 16% of Americans say they have ever invested in, traded or used cryptocurrency.
If you’re over 50, you probably know less about cryptocurrency than a recent college grad. But, no matter your age, you’ve probably realized that cryptocurrency is more than something people put in their digital wallets. More and more, people are putting crypto in their investment portfolios.
If you want a good primer on crypto before diving in, try this blog post from the CFA Institute.
Choosing good investment opportunities should always start with good metrics
The metrics that are most important for stock investments are sales growth and free cash flow. The interplay between them can help justify stock prices from penny stock companies all the way to the Fortune 500. Because cryptocurrency does not generate sales or cash, many famous investment managers and “fundamental” investors like Charlie Munger struggle when discussing cryptocurrency as an investment.
These same investors have historically held a negative investment thesis on gold and other commodities for the same reason they don’t like crypto. Gold doesn’t generate sales or cash, so how can you accurately estimate its true value? Value is determined solely by what the next buyer is willing to pay for it. This is why one of my investment mentors, William (Bill) Manning, once said: “If you buy a commodity for client portfolios you are failing as a fiduciary”. Why would he say that? Because there is no traditional way to value and monitor commodities as investments.
When it comes to metrics, cryptocurrency writes its own rules once again
Investing in cryptocurrency is a speculative endeavor just like investing in stocks or real estate, but even though you can’t measure sales growth and free cash flow, you can still find a metric to justify and monitor your investment thesis. Blockchain.com provides many handy charts and metrics for free. You can research these metrics and determine which to monitor to see if your investment of choice is headed in the right direction.
Fundamental investors such as Charlie Munger and Bill Manning have been right regarding their negative investment thesis on gold and commodities. Over the past 30 years, stocks have outperformed gold by 2.5x. But only time will tell whether their negative views on cryptocurrency will prove accurate as well.
Dive in with your eyes wide open
Are you about to board a rocketship or the Titanic? You won’t know if you haven’t identified a metric for following the asset that’s in front of you. If you haven’t identified a good metric to monitor your potential investment and know whether it is tracking your thesis or not, you are probably not ready to invest in cryptocurrency yet. But, now you know what you need to know before you jump in..
Let’s see where you are today.
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