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It’s a bear market again, can value investing be reproduced in cryptocurrencies?
Summarized by AI
Author: Fu Zhuorui
I still remember the start of the bull market in 2021 During the days when he was in power, the name that was mentioned the most, besides Cathie Wood, was Buffett. Of course, Buffett is in the cryptocurrency industry, because of his unfavorable remarks, he is more scolded. At the craziest time, people regarded ARK’s Cathie Wood as a god, and dismissed Buffett, thinking that he had not kept up with the times and could not understand new things. At that time, the earnings of any child in the US stock Tesla could make I muttered in my heart that Buffett was nothing more than that, not to mention the exaggerated fluctuations of altcoins.
How exaggerated was the market sentiment at that time? An Internet celebrity's self-made "Buffett's personal resignation letter" was published by major mainstream technology media without verification. People at that time were too willing to believe that the stock god was old and the new world had its own logic.
But when the bubble bursts and the liquidity shrinks, we will look at the income of Mu Mu after suffering It has retraced more than 60%, and Grandpa Buffett is still frighteningly stable. In the secondary market, retracement is the last thing players want to happen. What kind of thinking can the stability of God give us?
From January 2020 to May 2022, Buffett Compared with Cathie Wood's return on capital, the source of the picture is Twitter@CharlieBilello
The appearance of price investment
In the United States in the 1920s, the stock market was far less mature than the bond market, and it was an emerging niche market. There are few investors in this market, mostly traders. Among the traders, there are professionals and ordinary people. "Economists" are popular, and "leeks" are also chasing the remarks of star fund managers. At that time, there was no value investment, and everyone's trading methods were basically "technical", watching the trend and chasing the rising trend. Graham, who entered the financial market very early, was able to analyze the company's financial reports in this market, and soon became a big V and star manager. The fund he managed once made a profit of more than 100%, and the market value of the fund doubled by 6 in 3 years. times.
In the Roaring Twenties, Gatsby was fascinated by Daisy, while many ordinary people relied on the stock market The myth of benefiting, looking forward to Xianyu turning over and becoming rich overnight.
Graham
In 1929, Graham was already a millionaire (equivalent to today's billionaire), and he was ready to make a fortune. After all, the most famous economic Even before the stock market bubble burst in October of the same year, pundit Irving Fisher (monetary guru) swore that stock values hadn't been matched.
Beginning on October 24, 1929, the US stock market began to plummet, starting the notorious Great Depression, and the big V leeks were not immune . Irving Fisher and Graham's net worth has shrunk dramatically, and although Graham's fund lost only 70% of the market's 74% loss, this did not save his fortune that evaporated in a few days. Graham dismissed the servants in the mansion in New York, divorced and remarried and divorced again, and spent a relatively chaotic period. Afterwards, Graham learned from the painful experience, sorted out his value investment philosophy while teaching at Columbia University, published "Securities Analysis", and officially opened the era of value investment.
For more than half a century, Graham's disciple Buffett and others applied the theory of value investment to invest, creating a generation of investment masters.
The stock market at that time was somewhat similar to today’s currency market in some senses, so is the value investment used for stock analysis also Can it be used to watch coins?
Value investing is very simple, but the world is too complicated
Graham's value investing is very simple, and Buffett also uses the simplicity of theory in his operations, often performing calculation drills (napkin valuation) behind the napkin. Buffett himself has not done many pages of investment modeling and various sensitivity analysis. In terms of asset pricing and stock price argumentation, the operation of the stock god has always been as simple as white water.
The price investment calculation given by "Securities Analysis" is: V = EPS * [8.5 + (2*g)].
At that time, Graham’s PE value was 8.5, which was suitable for the PE value of companies with no growth rate when the book was written. Evolved, PE generally follows the company's value. For emerging companies that do not have many reference company indicators, Aswath Damodaran, a well-known professor at New York University, has a list of PEs in emerging industries. The calculation of this price investment has also changed slightly.
PE reference given by Damodaran, source NYU
Today, value investing has changed slightly, but the essence remains the same, and we still insist on looking for undervalued securities in the stock market. Commonly used indicators in modeling/calculation include PE, PB, EPS, etc. The most important thing is to leave a margin of safety (Margin of Safety), that is, the company's price is greater than the intrinsic value. Buffett recommends at least 25%.
The concept and practice of price investment has traveled through time with a generation of value investment masters, and based on ten years, it has become a bull-bear A hardcore. However, before the U.S. stock market fell to the bottom in 2020, value investment investors were rubbed by funds that advocate investing in emerging technology companies for a period of time, and the return rate was much lower than that of growth funds. One of the most eye-catching funds at the time, ARK of Sister Mumu, and the rise of Tesla, one of the stocks with the highest returns at the time, used a fundamentally different logic from value investing. Many technology stocks in our era are not profitable before and after listing, and the PE is dozens or even hundreds of times, but this does not prevent the explosive growth of these companies and stocks. The core logic of ARK is to hold heavy positions in technology stocks with explosive growth. In the era of technological explosion, such funds have indeed achieved extraordinary achievements in a short period of time. Exponential growth companies are not within the margin of safety for value investment funds, so value investors may not look at such companies at all.
Even in China, Hillhouse Zhang Lei, who advocates value investment and studied under Yale David Swenson, did not fully follow the classic value Instead, he re-published his views on "value", thinking that as long as "value", no matter how expensive it is, you can buy it. Therefore, Hillhouse also took a heavy position before Bilibili, a high-growth stock with negative profits every year. It is not within the margin of safety. , Pinduoduo, etc. At the same time, Zhang Lei emphasized that preliminary research is very important, which is somewhat similar to Li Lu, another man who insists on venture capital on the other side of the strait.
This feeling is similar to the logic of investing in Amazon twenty years ago. So it's not a bad investment, although it didn't turn a profit for the first time until 7 years after its founding, and the profitability was very thin.
In contrast, Buffett's position in the company has been the same for decades. Several stocks that Buffett outperformed the market: Coca-Cola in the 1980s, Apple in 2016, and TSMC in 2022, all have the following characteristics: comparatively low PE, industry leader, profitable, margin of safety, and good dividends.
For stock gods, buying and selling stocks is nothing special, the most important thing is to have a long-term profitable high-quality business. Stock gods generally hold cash in their hands, adhering to the belief that crisis is turning point, if there is no cash to buy high-quality assets at the right time, it is tantamount to investment failure.
Buffett does not reject technology, but whether the technology can match his indicators. Apple, which is run by the stock god, is one of the investment classics. In 2021, Berkshire Hathaway invested in Brazil’s FinTech disruptor bank, Nu Bank, which plans to launch its own cryptocurrency in 2023.
Buffett and his partner Munger publicly scoff at cryptocurrencies, believing that there is no real value behind the asset The technology and logic of blockchain are not exclusive.
Since the top value investment practitioners of our time do not recognize the encryption market, is it possible for the concept and operation of value investment to be applied to the project analysis of cryptocurrency? ?
It is difficult to define cryptocurrency, and so is price investment
Which asset class the cryptocurrency should belong to is something that regulators, investors, and users have not yet figured out, or maybe It should have its own asset class. In the eyes of regulators headed by the Bank of International Settlements and major central banks, cryptocurrencies are called "cryptoassets". Therefore, mothers and dads do not recognize the existence of cryptocurrencies as a currency in circulation. The risk of receiving cryptocurrency and so on does make it fail to meet the most basic requirements of some currencies. This is not only reflected in the documents released by Yang Ma, but also in the government's definition of cryptocurrency. For example, the documents filed by the US SEC against FTX show that the SEC believes that FTT should actually be regarded as a security through its previous buy and burn activities. If FTT is defined as a security, then BNB may also have similar properties. Securities are regulated by the SEC, whereas commodity contracts are not. Currently, the United States defines virtual currencies such as Bitcoin and Ethereum as commodities through the Commodity Exchange Act.
Cryptocurrency does have the attributes of bulk commodities and foreign exchange market attributes. Trading prices in commodity and foreign exchange markets are determined by supply and demand for assets. Similar to bulk commodities, the price of bulk commodities is the unit embodiment of a certain raw material (gold, oil, etc.), which has a one-to-one relationship. Each token of cryptocurrency is also a unique embodiment of a certain value. Both commodities and tokens need to be traded in pairs and are currently cyclical. Moreover, in the case of high inflation, the bulk and cryptocurrencies are considered by investors to be anti-inflation in a certain sense. Currently, cryptocurrencies that exist as commodities are relatively loosely regulated. If cryptocurrencies are defined as securities, cryptocurrencies need to provide more transparent financial reports, so that its price rise and fall will truly become the value that investors expect.
Even so, cryptocurrencies cannot strictly be called "electronic gold", despite the ups and downs of cryptocurrencies and commodities The trend is similar but not completely consistent. Some scholars (Lawuobahsumo et al., 2022) claim that this correlation is likely to be the spillover effect of other environmental factors in the market.
So as a currency, can encrypted "currency" use FOREX logic?
After all, the core logic of cryptocurrency is to solve the hysteresis of centralized currency from the very beginning. Make transactions faster, more convenient, anti-inflation, etc. Later, various encrypted "currencies" appeared, although many of them did not have the attributes of a currency in circulation, and were more like "stocks" of a company or project, just as the legal currency itself is also a national sovereign value to some extent. Reflect, although national debt would be a better analog.
However, some scholars (Liang et al., 2019) found that the current encryption market is more similar to the stock market after comparison. The FOREX market is not too similar, except that both are 24-hour trading. This is also relatively easy to understand. After all, the transactions in FOREX are all national legal currency and legal currency derivatives, and each legal currency is essentially a flow tool for trade in a certain country and region. On the contrary, the actual use behind each cryptocurrency is not the same.
Based on this, can it be said that cryptocurrencies are more suitable for analyzing the logic of securities, because we can see Cryptocurrencies have a very high correlation with US stocks. But but but, Isah and Raheem (2019) pointed out that the underlying logic of this correlation is the release of water by the US central bank (QE), so the rise and fall of the stock market and the encryption market all come from the tightness of the US dollar.
The correlation between Bitcoin and US stocks, source Seeking Alpha
So far, the author believes that although cryptocurrencies It has some characteristics of bulk, foreign exchange, and U.S. stocks (note that U.S. stocks are not other stocks), and cannot be simply attributed to a group. If it must be attributed, it has the greatest correlation with the US stock market and is deeply affected by macro policies. When there is no way to quantify the financial report of an encryption project, it does not necessarily use micro value investment, but is more suitable for following up macro operations. Therefore, value investing cannot be used in the encrypted market.
Asset Pricing in Crypto: What can you do if you can’t do price investment?
It is very difficult to do price investment research on cryptocurrencies. First, there is no mature quantitative system. At present, there is no major calculation tool to model. The second is that the encrypted currency data is also worrying. Unlike the financial reports in the US stock market, which cannot be falsified under normal circumstances, people can trust the financial data provided by the company, and the rest of the things that are not on the report are also traceable, but in encryption Currency, 6 million users may be just bragging, and the actual ARPU per user is only known by the company itself.
If there is no reliable hard data to measure specific items, how can calculation and value investment be carried out?
At present, some scholars still give some hard indicators of asset pricing modeling for your reference.
Hubrich (2017) applies the French-Fama model to cryptocurrencies with only 3 attributions. Scholars use the market value, trading volume, and market value/trading volume of coins as indicators to measure the market, and use the "spillover" effect of inflation per coin to measure the relationship between attributions (that is, the conversion rate of each coin mined, carry), Wait, the final conclusion is that the biggest reason for the performance of the project is the market, there is a little bit of carry before the currency, and the alpha is extremely small.
EY has also issued a report stating that CAPM can be used by cryptocurrency valuation portfolios, but it did not give details on how to use it guide.
The author is very interested in this topic, and welcomes readers who are interested in modeling or doing related work to contact the author, if we can Dev has developed some asset pricing systems for cryptocurrencies, whether it is price investment style or French-Fama style, the merits are immeasurable.
Why value investing (in cryptocurrencies)?
Graham proposed value investing, but he himself is not a master of value investing. Although the return is not bad, it’s just that he really has too many other hobbies. He even participated in the drafting of the Bretton Woods system, and considers his achievements in monetary theory to be his greatest contribution. In the following decades, as the U.S. stock market gradually matured, Buffett, who had a relatively single hobby and only liked to invest and make money, put this theory to the extreme.
In Graham's system, net is the core, that is, worthwhile stocks must be bought cheaply, and in groups Buy, if it rises, the rise will be huge, if it falls, it will not fall much. Then, we can grasp the two points of value investing: margin of safety + high value and low valuation. Based on this, although there are many excellent assets, Buffett may not invest in them because they are expensive. In 2020, Buffett has repeatedly stated that he does not intend to invest because the projects on the market at that time were too expensive. When everyone has lost their underwear, the stock gods with strong cash flow will start to sweep the goods.
But you may think this is a bug, "cheap" is a relative word, $600 is very expensive compared to $100 But $60,000 is cheap relative to the upside valuation. Price investment is definitely cheap. Not relatively cheap. When Buffett invested in Apple, its average cost was about $37, but today's Apple is already over $100.
Transferring these principles to cryptocurrency "investment", I think we can learn some feelings. In other words, usually don't chase the rise and fall with the market. Don't chase up when the market is high. When the project is relatively small, buy some stocks that can already enter the cash flow in a dispersed manner, and don't increase leverage. Technology doesn't necessarily work, because you don't have the logic to buy explosive technology. It must be checked whether there are positive funds, and this is a difficult point. Specifically, it may be possible to see whether gas/arpu+ users are a profitable business. Even if it falls, it will not fall much. When the market rises, it is natural to raise the value of the currency in hand. Buy a few more coins in a bear market, but also keep enough cash. Meme coins are untouchable. Don't be short.
We don't know if cryptocurrencies will mature like the stock market or if they won't exist one day. And the above summary only supports friends who want to uphold the value investment belief in cryptocurrency, not verbally, but actually abide by the core logic of value investment.
At least Buffett used his investment career to prove that value investing is still an evergreen tree. While ARK achieved a 152% return in 2020, Tesla also peaked at a 695% return. By 2022, the ARK retracement will reach 65%. Berkshire Hathaway's retracement due to stock decline in 2020 was only 19%, and continued to be brilliant in the next two years. In 2020, it held about US$48 billion in cash and swept the world. Servi's share price hit another record high. This is the closest operation of the stock god to us. In fact, Buffett's operation is the same every ten years. The stock gods have told everyone time and time again, buy cheaper, buy a good company, you can hold it when you buy it, and don't do messy operations, but everyone thinks this method is too simple, so simple that it doesn't reflect the complexity of finance and the market. understand.
Reference
https://mudrex.com/blog/what-is-value-investing-in-cryptocurrency/
https://www.holcombefinancial.com/decisions/warren-buffetts-simple-investing- principles/
https://www.motilaloswal.com/blog-details/similarities-and-differences-between-crypto-and-forex-online-trading/20126
https://thevineadvisors.com/resources/ cryptocurrency-a-commodity-or-a-security-and-why-that-makes-all-the-difference/
https://virtuse.medium.com/8-surprising-similarities-between-commodities-and-cryptocurrencies-ba5c4a665b17https://doi.org/10.3390/commodities1010004 https://www.researchgate.net/publication/332786433https://ijbmcnet.com/images/Vol1No2/1.pdfhttps://deliverypdf.ssrn.com/delivery.php?ID=421000089122084068066090117086110031057007068045058024089023086126082020086087 017010033060122005052003049114067019005091109082112008078077085086092021105066078119034020076099121076082123117125006005092 112074068094088101102022016088105123095097094116&EXT=pdf&INDEX=TRUEhttps://www.bis.org/publ/arpdf/ar2018_5_zh.pdfhttps://www.jinse.com/blockchain/1043077.htmlhttps://www.weiyangx.com/249739.htmlhttps://assets. ey.com/content/dam/ey-sites/ey-com/en_gl/topics/emeia-financial-services/ey-the-valuation-of-crypto-assets.pdf
https://cointelegraph.com/trading-for-beginners/the-most-common-crypto-metrics-a-beginners-guide
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