Cryptocurrency is the last topic that I thought I would be writing about, but I am writing because in the last couple of days a bunch of my friends have mentioned it and some have put money into it.
Before I dive into why I don’t like the idea of buying Cryptocurrency, lets revisit the definition of an “Investor” as mentioned by Ben Graham in his book “The Intelligent Investor”.
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Why I will not buy Cryptocurrency?
- I cannot value it. It’s a speculation, I cannot perform any analysis
- I can invest in great American businesses which I can value
- I am concerned about the sharp increase in price & volatility
If you cannot determine whats its worth don’t buy it. Don’t buy something just based on a hope that it will go up someday. Hope is not a dependable friend in investing, it leaves you quickly in trying times. Price doesn’t go down by itself it takes hope with it and when hope dies you sell, promising yourself that you will never invest again. It’s a great advantage to know the value of an asset because from time to time markets behave irrationally. Factors unrelated to the underlying value of an asset cause its prices to rise or fall. But if you know the value and the price goes below it you will be able to make an informed buying decision. Read my earlier post on how to value a company.
The current run-up in price is another concern, it suggests that buyers are driven by greed & the fear of loosing out. The dominant feeling is that a lot of money can be made quickly. I don’t know the transaction volume but the sharp increase in price also suggests lack of sellers in the market. I assume greed has something to do with that as well. I have heard numerous people say that oh, I am going to invest only a small amount of money. My biggest fear is that if these bets do not pan out & result in loss of principal, these folks will stop investing altogether.
Warren Buffett recommends that an investor should view herself or himself as a Baseball batter and view the market as a pitcher which is throwing investment ideas at you. In Baseball a batter has no option but to swing, however, as an investor you can choose not to swing. He advocates playing the wait & watch game and to only swing when the pitch is in your sweet spot. Identify areas that you are good at, businesses that you understand better than others. You may understand retail business better than the hospitality business. There is no need for an investor to understand all sectors of the S&P 500. Only invest in the areas that you understand.
In conclusion, I am not suggesting that money cannot be made in Cryptocurrency or it can’t be the next big thing. If you can value it buy it. It’s just not for me at this time because I cannot value it. Its value is cryptic to me. Happy Investing!
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.
