Investing successfully in crypto requires a solid foundation for making decisions based on value. The efficient-market hypothesis suggests that prices already include all available information about an asset and reflect its perfect value. However, there are numerous examples in both crypto and stock markets that contradict this theory. In reality, markets are often irrational and prices do not accurately reflect value. This is where the concept of value investing comes in. It attempts to identify securities that are undervalued due to market irrationality and are trading below their actual value. Fundamental analysis is one of the tools used to spot these opportunities.
The same goes for crypto assets. Bitcoin’s price fell during the Covid-19 crash in 2020, only to recover and double its price in the following months. These price movements did not accurately represent the real value of the network, its activity, active wallets, transaction volume, and network usefulness. Fundamental analysis enables investors to understand the industry and identify the highest-potential investments across a long-term horizon.
There are important axioms for any asset, including crypto assets. Most crypto assets represent an underlying network, utility, or community, built on some spectrum of decentralization. Valuation methods are important to maintain a rational investment strategy and minimize risks. Prices are the result of many variables that often differ from the value, such as sentiment, hype, speculation, and fear, among others. Valuation, on the other hand, refers specifically to determining an asset’s financial value using fundamental analysis.
Given the diversity of crypto assets in the market, there is no “one-size-fits-all” valuation method. Investors need to categorize the asset and use an analysis of their choice to determine its value. Long-term successful investing in crypto requires a solid framework for making investment decisions based on value rather than speculation.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.