Trading Strategies of the Future Cryptocurrency Investor

 

Charles Munger, the 94-year-old vice-chairman of Berkshire Hathaway spoke on Wednesday, February 14th at the annual meeting for The Daily Journal Corporation of which he is chairman and publisher. “It’s just disgusting,” Mr. Munger said, “Bitcoin is a noxious poison.” He added that the United States Government is wrong not to be “stepping on it” as is the government of China.

 

In December Mr. Munger, the Harvard-educated lawyer and self-made billionaire told attendees at a University of Michigan Business School event to avoid bitcoin “like the plague,” and that it is “the last thing on earth that you should think about.” “It is total insanity,” he added.

 

Bitcoin and cryptocurrency represent the antithesis of a sensible investment for Mr. Munger. He is a career-long advocate of the Graham and Dodd value approach to investing and his $1.74 billion net worth is evidence of his success. “Mr. Market,” says Benjamin Graham, shows up every day and the investor should disregard the irrational behavior of the salesman at the door because he will return again tomorrow. Rather than pay attention to market moves, the “intelligent investor” should calculate a company’s intrinsic value through fundamental analysis to determine whether the company’s stock is reasonably priced.

 

Fundamental Analysis seeks to determine the underlying value of a company and compute a numeric representation for comparison to the price of a share of the company’s stock. Factors a fundamentalist considers include gross and net income, earnings (profits) and the potential for growth of those earnings over time. Other factors include book value, total debt and cash-flow, all of which determine a company’s worth for comparison to other similar companies. The Price to Earnings Ratio (P/E) and Price/Earnings To Growth Ratio (PEG) are critical comparators.

 

The formula, as described in Benjamin Graham’s The Intelligent Investor is:

V=EPS x (8.5+2g)

Where:

V = intrinsic value

EPS = company’s trailing-twelve-month earnings per share

8.5 = P/E base for a zero-growth company

g = company’s long-term growth rate

Source: Investopedia

 

The late Mr. Graham, Mr. Munger, and their like cannot conceive of cryptocurrency as an investment because none of their favorite factors exist for entry into their comparative formula. When a zero is entered for EPS, the V becomes zero. Bitcoin produces nothing but an unalterable chain of transactions, has no income, pays no dividends nor reports earnings to substantiate its market price.

 

Neither does gold have earnings or pay dividends, yet it trades for about $1350 per ounce even though there are nearly 6 billion ounces in circulation and over 50 million more being produced every year. Bitcoin (BTC) trades for $10,000 per unit, but only 16.8 million Bitcoins are now in circulation, and by design of its inventor, less than 5 million more will be produced over the next hundred years. Gold in circulation today is worth $7 trillion. Bitcoin by comparison to gold, if at least an equally trusted store of value, should be worth over $400,000 per coin.

 

Technical Analysis may be a more suitable method for bitcoin as it is for gold. Technical Analysis grew out of Dow theory, first described in series of Wall Street Journal editorials written by its founder and then editor—Charles Henry Dow. Mr. Dow also co-founded Dow Jones and Company and invented the Dow Jones Industrial Average. He proposed that the stock market immediately discounts all news; that all that can be known about listed stocks is known and is reflected in their prices. What matters in Dow theory, and Technical Analysis, are the prices of shares and the number of shares traded at those prices. If a stock rises in price with a high relatively high number of shares traded, that action is more predictive of its future direction than the same movement on low volume.

 

Technical Analysis can be applied to any market for any traded share, commodity or currency. Stocks, cattle, soybeans, metals, oil, dollars and real estate can be analyzed technically. All one needs to get started are the daily prices, volumes traded, a pencil and a piece of graph paper. Computers have made the process infinitely easier. A once unknown level of sophisticated technical analysis is now available on sites such as finance.yahoo.com and marketwatch.com.

 

Highly complex calculations involving both fundamental and technical analysis have been programmed into computers and now run relentlessly. New algorithms are inserted into computerized trading programs that adjust to market actions and international news. Earnings expectations and technical trends are now interpreted by machines that learn and act faster than human beings could envision when the first financial formulas were invented.

 

What is new about cryptocurrency trading is that transaction time has almost disappeared. A one-megabyte bitcoin block of transactions of any value can be transferred every ten minutes and that is slow compared to more recently invented cryptocurrencies.

 

Warren Buffett, “The Oracle of Omaha” and Chairman of Berkshire Hathaway has added his personal touch to stock analysis. Now called Qualitative Analysis, Mr. Buffett’s method sought out information that did not translate readily into numeric values like management expertise, labor relations, brand recognition and consumer loyalty. Berkshire Hathaway retains the name of Mr. Buffett’s first venture. He bought a failing textile company in Berkshire County, Massachusetts and learned his lesson the hard way.

 

When later he expanded into the insurance business, he began taking a look behind the numbers before investing. After poring over earnings reports, balance sheets, and income statements, Mr. Buffet learned as much as he could about internal operations, quality of products and workplace environments—the kind of intelligence that cannot be measured with a single number. Those factors included the overall satisfaction of insurance customers (GEICO), how well regarded is a brand of underwear (Fruit of the Loom), the taste and texture of soft-serve ice-cream (Dairy Queen), where people prefer to shop (Costco and Walmart), and which smartphone is most desired (Apple).

 

Warren Buffett, if he wanted to, might be able to pick cryptocurrency winners with his behind-the-scenes approach. Instead of blindly buying bitcoin, Mr. Buffett might note that Ethereum allows for programming individual blocks with “smart contracts”, or that Ripple (XRP) technology is being tested for money transfers by Western Union.

Just as a sophisticated investor may have chosen Ford, GM, and Chrysler for eventual automobile industry dominance in the early Twentieth Century, or a similarly talented capitalist may have picked Amazon, Google and Netflix as the turn of the millennium approached, so a trader attuned to developments in distributed ledger technology might be able to buy the long-term cryptocurrency survivors. But an “intelligent investor” needs a dependable source of data and an up-to-date set of tools with which to formulate an investment strategy.

 

As the early 20th-century investor may have used The Wall Street Journal and a personal ticker tape to choose between automobile stocks, or as the turn of the millennium investor may have used TD Ameritrade for securities information and investment strategies, also today one needs a user-friendly platform from which to launch a cryptocurrency trading strategy. 

 

Signals will offer such an accessible solution. On a single platform, Signals will connect cryptocurrency traders with data science developers. Traders will identify the market trends they are following and programmers will adapt algorithms, machine learning and artificial intelligence to traders’ insights. Future platform evolution will be funded by the upcoming Initial Coin Offering (ICO) of the Signal Token (SGN). Users of the Signal Strategy Builder, traders, and developers, who are willing to share a winning strategy will be paid for their work in SGN.

 

Venture capitalization in the 21st Century may be as different from that of the 20th as the factory is different from the farm, as the computer from the abacus, as the Internet from the library. Economic survival on the planet will be increasingly dependent on intellectual property rather than “real” property. Previously unknown markets for ideas demand new approaches to financial analysis.