When applying value investing principles to cryptocurrency investments, there are four critical questions to ask before making any buy or sell decision:
- Is this project a strong contender in a promising sector? (Buying tokens means investing in the project itself.)
- Have I truly understood this project to meet my competency standards? (Staying within your circle of competence.)
- Am I buying at a price that provides a sufficient margin of safety? (Margin of safety.)
- Am I leveraging the market, or is the market leveraging me? (Mr. Market.)
Among these, questions 1 and 3 help guard against our own ignorance, while questions 2 and 4 help us combat human nature. Ignorance and human nature are the only two reasons people lose significant money in the markets.
Understanding Value Investing in Crypto
If there’s one term in the crypto space that is both widely used and deeply misunderstood, it’s “value investing.” You’ve probably seen comments like these in various group chats:
- “I’ll just hold; if it drops, I’ll consider it value investing.”
- “This project is solid—it’s a value investment for the long term.”
- “Bitcoin and Ethereum are value investments; altcoins are not.”
- Or even: “Don’t talk about value investing in a bull market.”
It’s unclear whether those making such statements have actually profited, but one thing is certain: they don’t truly understand value investing.
While the concept of value investing isn’t overly complex, it’s also not as simple as many believe. The principles were initially systematized by Benjamin Graham, author of Security Analysis and mentor to Warren Buffett. Later, figures like Philip Fisher, Charlie Munger, and Seth Klarman expanded on these ideas. Buffett, in particular, popularized the term, making “value investing” a household phrase in the investment world.
You can find many lengthy articles explaining value investing, but at its core, it rests on four foundational principles:
- Buying tokens is investing in the project.
- Circle of competence.
- Margin of safety.
- Mr. Market.
These four concepts form the philosophical universe of value investing. When you understand, believe in, and fully practice these principles, you are on the path of value investing.
The Four Pillars Explained
1. Buying Tokens Is Investing in the Project
A token derives its value from representing ownership in a project, which in turn creates value by generating profits and cash flow. When you buy and hold a token, you essentially own a piece of the project. The value of this ownership is ultimately determined by the project’s ability to generate future free cash flow.
This introduces the concept of intrinsic value: the total discounted cash flow a project will produce from now until it ceases to exist.
Discounted refers to adjusting future asset prices to their present value.
2. Circle of Competence
Invest only in areas you understand and where you have an advantage over most market participants. Adhere to the principle: “It’s better to miss an opportunity than to make a mistake.”
3. Margin of Safety
Imagine building a stone bridge rated for 20 tons but only allowing vehicles up to 15 tons to cross. The extra 5 tons of capacity is your “margin of safety.”
In investing, this means buying tokens at a price below their intrinsic value—what Buffett calls “buying a dollar for forty cents.” The margin of safety creates a buffer between your hard-earned money and potential miscalculations, errors, bad luck, or market volatility. The larger the margin, the more room you have for error, reducing the likelihood of losses.
4. Mr. Market
The concept of “Mr. Market” comes from a parable by Benjamin Graham in Security Analysis. Imagine you’re transacting with a person named Mr. Market who daily offers to buy your tokens or sell you his. Mr. Market’s moods are highly unstable: some days he’s euphoric and offers high prices; other days he’s despairing and offers low prices. He doesn’t mind being ignored—if you dismiss his offer today, he’ll return tomorrow with a new one.
The key takeaway: Mr. Market provides asset prices, not asset value. If you base your investment decisions on market prices alone, you’re being used by Mr. Market instead of using him to your advantage.
In summary, value investing means:
Choosing, within your circle of competence, to buy assets at prices below their intrinsic value, ensuring a sufficient margin of safety.
The Benefits of Value Investing
As a beneficiary of value investing myself, having achieved initial financial freedom, I can attest to its many advantages. Two stand out:
- It enables long-term compound wealth growth.
- It shields you from market noise and price fluctuations, leading to a higher quality of life. Many value investing masters enjoy long lifespans.
But the critical question remains: Do value investing principles apply in the cryptocurrency space?
After all, value investing champions like Buffett and Munger have consistently expressed disdain for Bitcoin and cryptocurrencies.
My view is: Yes, they are equally effective.
Buffett may never buy Bitcoin, but many crypto projects might make his mouth water.
Bitcoin is digital gold for our era. Buffett has stated he doesn’t invest in gold because it isn’t a productive asset like a company or farm that continually generates goods people need, yielding cash and profits.
All the gold in the world forms a cube about 20 meters on each side—unchanging and producing nothing over time. He doesn’t buy gold, so he naturally wouldn’t buy its digital upgrade, BTC.
However, while value investor Buffett doesn’t buy gold, he has invested in a gold-producing company: Barrick Gold, the world’s second-largest gold mining company, because it excels at generating cash flow. Similarly, if there are crypto projects that meet such criteria, even Buffett might be tempted.
Applying Value Investing to Crypto Projects
So, what kinds of crypto projects meet these investment standards? Let’s revisit the four pillars and adapt them to the crypto world:
- Buying tokens is investing in the project.
- Circle of competence.
- Margin of safety.
- Mr. Market.
In the context of crypto investments, we can interpret these concepts as follows, supplemented with examples for clarity:
1. Buying Tokens Is Investing in the Project
The crypto projects we invest in should exhibit these traits:
a. The project’s token captures all or most of the economic value it creates, without decoupling from project development (sound token economics).
Example: Some projects are popular with large user bases and high activity, but most of the value isn’t transferred to their tokens. Certain crypto wallets have massive user numbers, transaction volumes, and managed assets, yet their token market caps remain small. This happens because the value provided to users isn’t captured by the token.
b. The project operates in a sector with large potential, strong growth, and a long lifecycle.
Example: Mixer projects like Tornado Cash address a specific need (privacy and anti-tracking), but the actual demand scale is limited compared to other sectors (there aren’t that many users with money-laundering needs). This creates a clear ceiling on business scale. In contrast, lending, trading, and derivatives are excellent long-term sectors.
c. Beyond being in a good sector, the project itself demonstrates excellent management, governance, awareness, and execution.
Example: Many projects entered promising sectors early but fell behind over time. A typical case is BurgerSwap, the first swap project on BSC, now far overshadowed by later entrants like PancakeSwap.
2. Circle of Competence
As Charlie Munger said, “If I know where I’m going to die, I’ll never go there.” Most significant investment failures occur in areas we don’t fully understand but think we do.
How can you determine if you “understand” a project? Here are two reference standards:
- Your knowledge of a sector or project surpasses that of 90% of other investors in it.
Note: We often overestimate our competence. When we think we know more than 90% of others, we might only be ahead of 70%. - When others discuss the project, they rarely bring up information you’re unaware of or perspectives you haven’t considered.
If you don’t meet these standards, you probably shouldn’t place heavy bets here. At the same time, in this rapidly evolving, information-explosive industry, we must accelerate our learning to expand our circle of competence. This allows more sectors and projects to meet the “understandable” standard, unlocking more investment opportunities.
3. Margin of Safety
Leaving a margin of safety for your investments requires estimating the project’s “reasonable value.” Based on this estimate, you then apply a discount—this discount is your margin of safety.
Most crypto projects are nearly impossible to value accurately. Using valuation methods like DCF (discounted cash flow) involves too many uncertainties: project lifespan, growth rates, etc. Thus, relative valuation might be a more practical approach.
For instance, in a past research report on Venus, I used horizontal and vertical relative valuation to conclude that Venus was severely undervalued at the time. Often, we can’t pinpoint a crypto project’s exact valuation, but we can use relative valuation to identify “visibly” undervalued projects. As Buffett says, when we see a fat person, we might not know their exact weight, but we know they’re fat.
👉 Explore practical valuation techniques
4. Mr. Market
For this principle, simply remember: Mr. Market offers prices, not wisdom. Market reports reflect the collective voting of all participants at the moment, not the absolute truth about the project.
Key Questions Before Investing
In summary, when using value investing principles for crypto investments, consistently ask yourself these four questions before any decision:
- Is this project a strong contender in a promising sector? (Buying tokens = investing in the project.)
- Have I truly understood this project to meet my competency standards? (Circle of competence.)
- Am I buying at a price that provides a sufficient margin of safety? (Margin of safety.)
- Am I leveraging the market, or is the market leveraging me? (Mr. Market.)
Questions 1 and 3 help combat ignorance; questions 2 and 4 help combat human nature. Ignorance and human nature are the sole reasons for major losses in the market.
Why Value Investing Works
Why does value investing generate profits? It hinges on a simple belief: If money falls on the ground, someone will pick it up. The more money there is, the more people will try to pick it up, and the faster it will be collected.
For an undervalued asset, rational buying forces will eventually outweigh irrational selling forces. Wealth consistently flows from less knowledgeable, irrational investors to more knowledgeable, rational ones over the long term—an irreversible process that enriches the rational.
The more undervalued an asset, the stronger the rational investors’ buying power becomes. The market pendulum, after swinging to an extreme, inevitably swings back. Inadequate selling pressure eventually crumbles against deep buying interest, and sellers may even surrender and join the buying side—which might be when rational investors start exiting.
A Final Note
Value investing isn’t the only way to make money. Many people profit handsomely from trend trading, leverage contracts, or even buying high and selling low—relying on skill or luck. Instead of envying them, admire and wish them well. But emulating them lies outside my circle of competence.
Frequently Asked Questions
What is value investing in cryptocurrency?
Value investing in crypto involves analyzing projects based on their intrinsic value, ensuring they operate in growing sectors, and purchasing tokens at prices below this value with a margin of safety. It emphasizes long-term holding over speculative trading.
Can value investing be applied to all cryptocurrencies?
Not all cryptocurrencies suit value investing. It works best for projects with clear utility, strong fundamentals, and sustainable tokenomics—like those in decentralized finance (DeFi) or infrastructure. Meme coins or purely speculative assets rarely fit this framework.
How do I determine a cryptocurrency's intrinsic value?
Calculating intrinsic value in crypto is challenging but possible through relative valuation, analyzing cash flows (if applicable), adoption metrics, and comparing similar projects. Focus on sectors with predictable revenue models, like exchanges or lending protocols.
What is a margin of safety in crypto investing?
A margin of safety means buying a token significantly below your estimate of its intrinsic value. This buffer protects against errors in valuation, market volatility, or unforeseen project issues. Aim for discounts of 20-50%, depending on risk tolerance.
How can I expand my circle of competence in crypto?
Stay updated on industry trends, study successful projects, join knowledgeable communities, and analyze both successes and failures. Focus on niches you understand deeply, then gradually broaden to adjacent sectors like NFTs, Layer 2 solutions, or governance models.
Is value investing compatible with short-term crypto trading?
Value investing is inherently long-term. While short-term trades might occasionally align with undervalued assets, the strategy thrives on patience and ignoring market fluctuations. Day trading or leverage typically contradicts value principles.