How To Invest in Crypto Like Warren Buffett
"Cryptocurrencies basically have no value and they don’t produce anything" - Warren Buffett
This letter is for informational purposes and is not investment advice. I don't endorse, nor at time of writing hold any project mentioned in this letter.
“I don’t have any cryptocurrency and I never will” - Warren Buffett
Warren Buffett is not a popular man in the cryptocurrency space.
After all, it’s hard to love someone that often uses his large platform to bash on one of your most prized assets.
However, just because crypto fanboys hate him, and he hates crypto, doesn’t mean we can’t still learn from him and apply his principles in our own investment practice.
After all, Buffett is one of the most successful investors on the planet. Over the past 55 years, he has outperformed the S&P 500 by 2,700,000% (27,000x returns).
Those are profit levels that can make even the crypto-billionaires a little envious.
But what’s more interesting for us is that his investment philosophy has remained well-defined and consistent for decades.
And the best part about it? He can sleep well at night with the investment choices he makes.
So, how does he do it, and how can we as blockchain investors integrate and apply these principles?
How can we pick winners with massive returns far in advance of most people recognizing their true value?
And most importantly, how can we sleep easily each night, knowing we made the wisest decision possible?
We’re going to look at some of his investment practices and translate each one into the cryptocurrency space.
“Our favorite holding period is forever.” – Warren Buffett
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” – Warren Buffett
The only people who honestly believed that Bitcoin would be $60,000 ten years ago in 2011 were basically nuts.
I personally knew someone like this, and I put in effort to stay physically distant from them.
Bitcoin was $1. It was mainly being used for drugs, it was stalked out by the feds, and it was a huge pain in the ass to buy it. It wasn’t clear then how cryptocurrencies were going to advance beyond that state in any reasonable way.
And like I wrote in The Day Bitcoin Goes to $0, Bitcoin might still not even be worth that much.
The notion of value-investing in crypto back then was a hazy concept.
However, the markets have matured considerably, and it has become increasingly possible to identify long-term opportunities.
If you know the problems in the blockchain space, as well as the capabilities that blockchain technology has the potential to unlock, then identifying portfolio options is easier for you.
And if you do this well, you can make off better than most people in crypto by simply holding your portfolio’s assets for several years.
While it’s certainly possible that a few people day-trading crypto may perform a bit better than holders who simply made one or two wise choices, I bet you can guess which group slept better at night.
Let’s look at two examples of value-based growth that are a little less obvious in retrospect than Ethereum: Chainlink and Uniswap.
A couple of years ago smart contracts weren’t able to execute based on real-world data. If you placed a bet on a horse race using an Ethereum smart contract, it had no way of knowing who won the race.
Chainlink came along and provided a service known as an “Oracle”. The oracle service provided real-world data from verified, trusted sources.
Once those services were created, it became possible to build much more impactful blockchain applications, such as those dealing with the transfer of property rights.
Uniswap was a solution to centralized exchanges. It was able to successfully implement a Decentralized Exchange (DEX) in a relatively usable manner.
DEX’s were fantasized about for years in crypto as a possibility that crypto itself could solve. Centralized exchanges had a few major problems, such as:
Hackings
Exchange owners faking their own deaths in the Philippines and stealing all of the crypto
Holdings getting locked for months on-end.
Limited trading pairings
Pain-In-The-Ass authentication setups
A working decentralized exchange meant being able to trade any crypto asset on a network directly with any other crypto asset, all from the full security of your own wallet, and no middlemen.
Let’s note one more thing: The space is still young. Both of these examples only solved problems specific to blockchain technologies. They didn’t solve any “real-world” problems.
But just like the computer industry in the 60’s, many companies back then were solving problems related to computers themselves, rather than external business cases in other industries.
Buffett follows the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic value.
If everyone could simply identify value, most people would be performing as well as Warren Buffett.
The Dunning-Kruger Effect is strong here, where folks feel like they can just read a few investment books (or less) and start calling shots like Buffett.
But the fact is that there is generally a huge discrepancy between the knowledge of the investor market at large, and the actual problem-space of specific markets that represent opportunities.
This knowledge is extremely important when it comes to making cryptocurrency investments.
The space is evolving quickly, and close attention must be paid to the current problems in the space, as well as which technological capabilities are becoming enabled by new blockchain frameworks.
This knowledge gives a savvy investor the advantage of knowing:
Which solutions are valuable because they solve immediate pain-points and roadblocks in the space (which means the solution will touch everything going forward by being a foundation building block enabling future solutions).
Which solutions are valuable because they fulfill the promise of a technological capability enabled by blockchain advancements.
Which solutions are scams, because they aren’t even technologically feasible in the near-term.
Read 500 pages everyday
Most of us simply don’t have the time, discipline, or acuity to read 500 pages each day.
However, Buffett is an avid reader, and it has obviously contributed to the success of his decision-making.
Buffett often isn’t reading books, however.
When he invests in a company, he likes to read all of its annual reports going back as far as he can.
And he usually reads the news from several newspapers each day.
He also tries to keep up with what his portfolio companies are doing, if they are maintaining their competitive advantages, and any other changes in the market.
Crypto doesn’t have the convenience of annual reports and recorded quarterly calls though, so how can we apply this reading habit in our space?
First, find out what a project is about from its website.
If it’s interesting, then try to find the most active community channel.
Evaluate how active and responsive the discussion is, and if questions are being genuinely answered.
See if your own questions get answered without hostility, and if those answers make sense.
Read the project’s whitepaper.
Try to find articles or social-media discussion surrounding legitimate business use-cases for the project.
The most important practice here is reading to gain an understanding of the unique value of a specific blockchain project, and how it works.
The other aspect is having a lens into the community to understand if and how the project is advancing; as well as discussion of any competitors. The community channels provide the opportunity to evaluate these factors daily.
“Risk comes from not knowing what you are doing.” – Warren Buffett
Let’s be real: The average crypto investor is a speculative gambler.
Most folks I talk to in the space have almost NO interest in the fundamentals of the tech.
They hardly care. They know it can be used as a currency, and they really just want to know what’s going to go up next.
This is evidenced by just how much money has gone into Dogecoin this year, despite the coin intentionally being built to be fundamentally worthless.
Hardly anyone cared that the coin was fundamentally worthless though.
They just knew a lot of people were piling on, and that it was an opportunity to see their investment “go to the moon”.
Of course, a lot of people got massively burned.
The same phenomena played out for several other meme coins, as well as several small-cap pump and dump schemes.
Unfortunately for these folks who invested in memecoins, all prices fall back to their fundamental value over time.
And while it’s easy to pile in on a single coin because everyone else is saying to…
The only way to make the best possible decision is to actually do the research to understand the significance of the project you’re supporting with your hard-earned dollars.
While that takes some real work, and involves possibly making decisions the majority of the crypto crowd is clueless about, that space is where the opportunities lie.
'Don't watch the market closely' - Warren Buffett
What Buffett means here is to not spend much time watching the daily price fluctuations of the market.
This is vital if you want to keep your sanity in crypto.
If you did your due diligence…
Plus you know you made a wise decision
and you’re keeping up with the status of the projects to know they’re in good health…
Then why are you checking the price every 5 minutes?
If you’re over-leveraged to the point where a crash would bankrupt you, then you’ve invested too much and should stop holding crypto.
But otherwise, you’re going to drive yourself insane watching price fluctuations.
It’s natural to be curious about the price.
After all, there are very few assets in human history that might regularly double or triple, and then halve all in a matter of days.
It’s hard not to watch the price changes. But it’s not good for you. Check out this quote about Bitcoin from Steve Wozniak (Cofounder of Apple):
“When it shot up high, I said I don't want to be one of those people who watches and watches it and cares about the number. I don't want that kind of care in my life... Part of my happiness is not to have worries, so I sold it all and just got rid of it.” – Steve Wozniak
Now, this is coming from someone whose net worth is $100,000,000. And the price fluctuations still bugged him to the point that he was constantly checking it!
Woz didn’t need or even want the money though. If Bitcoin rose to $1,000,000, it wouldn’t have changed Woz’s life one bit.
If you’re reading this, you are likely in a different boat.
And because of this, it’s vital that your crypto investment doesn’t give you an anxious habit of constantly checking it.
But really, the only way to do this is to know what you’ve invested in, and why it’s a good long-term investment that’s not based around hype or memes.
“Show me the incentives and I will show you the outcome.” - Charlie Munger
Okay, so Charlie Munger isn’t Warren Buffett.
He was only Buffett’s investment partner for over 40 years. But this quote was so important that I had to translate it to the crypto space.
One of the most important concepts surrounding crypto investments right now is tokenomics.
The tokenomics of a project are incentive structures set up by a project to reward and spend that project’s token. It’s about:
The rewarding of the token to infrastructural supporters of the project
The spending of the token for the actual utilization of the project’s various features, usually partially given to the infrastructural supporters.
If the tokenomics aren’t designed well, very few people will want to contribute to making the project’s vision a reality.
People need to be properly incentivized to provide their computational resources to the project in general.
And the project must be inherently useful enough that people actually want to buy the token to use it, giving it enough value that project supporters feel adequately rewarded.
This is such an important and complex topic, that entire textbooks have already been written for the purpose of designing fundamentally strong token economics for new projects.
If the incentive structure isn’t set up correctly, it’s unlikely that the project’s token will ever go far above $0.
So why does Buffett Hate Crypto?
You’re probably wondering: “If Buffett’s such a smart investor, and he hates crypto, why should I even invest in crypto?”
And my honest assessment of this is that Buffett’s understanding of Blockchain is locked to some time around 2011.
He still views cryptocurrency as just plain-ol’ Bitcoin, whose only function was an anonymous currency for hackers, drug dealers, and pirates.
And if the space hadn’t advanced at all since then, he’d be right.
But the key piece he’s missing is that Bitcoin was simply a proof of concept.
What concept was Bitcoin proof for?
The idea that people could collectively combine their computational resources for a common goal in exchange for a reward.
Bitcoin was basically the prototype of this idea. Proof of Work block confirmations meant that the only goal those computers were ever going to accomplish was mine hashed transactions.
More advanced validation mechanisms, such as Proof of Stake, means that computers can be rewarded for direct computational contributions, and open up whole new worlds of technological possibilities based on collective effort.
And my guess is that these “far out” concepts are so beyond the reach of Buffett’s traditional understanding of the financial and technological world, that he won’t even try to comprehend them.
I say this because he’s still fixated on the notion that cryptocurrencies are only meant to compete with fiat currencies, which isn’t even the goal of most projects these days.
But who can really blame him? Buffett was actually never a technological investor. He missed Apple and Microsoft, and once said himself:
"I don’t know what that technology world will look like in 10 years. Technology is just something we don’t understand, so we don’t invest in it."
Buffett’s first major technological investment was IBM in 2011, and he only saw a 5% return from that over 6 years.
Considering Buffett’s history with technology, I think it’s okay to stray a little from following his every word when it comes to investments in burgeoning technological fields.
I hope this helps add some value and strategy behind how you identify worthwhile projects.
And most importantly, I hope this helps you sleep at night.
Best,
Gabe