Investing in Cryptocurrency — Warren Buffett Style
Disclaimer: To modify a quote from Tim Ferris, “I am NOT a financial advisor, and none of this advice should be taken without speaking to a qualified professional first. Also, my results [are most likely] due to pure luck and zero skill.” But…this is working for me.
It’s no secret that Warren Buffett is not a fan of Bitcoin. It’s also no secret that the cryptocurrency investment market is fraught with millennials looking to make their fortune. But by applying a few rules learned from studying Buffett, the cryptocurrency market has made me a 5,982% ROI in just under a year. How should you adjust your habits to do the same?
Head on over to any popular cryptocurrency exchange and you’ll find your “stereotypical millennial” lounging in a “trollbox” day trading different crypto. And who can blame them? The cryptocurrency arena is littered with overnight rags-to-riches stories to the degree of the lottery with a frequency that would make most lottery players quit in favor of crypto speculating. Unfortunately, though, most “players” of the crypto game will be sorely disappointed.
Gaming the cryptocurrency market is more insane and just as impossible as gaming the stock market. While the Dow Jones volatility average has historically stayed around 10-15%, it is not uncommon for the cryptocurrency market to swing anywhere from 20–50%! Day trading, for most people, is an exercise in insanity. However, I believe there is substantial money to be made by following legendary investor Warren Buffett’s two rules of investing:
1) Never lose money. 2) Never forget rule #1.
In a market that is extremely volatile, you may ask, how is it possible to follow these two rules? I believe that, following Buffett’s example set in the 1950s, a solid profit can be made from investing in cryptocurrencies.
In 2014 I got into the cryptocurrency day trading scene. It took me less than a year to get burnt out, after losing a good bit of money. However, I was fortunate enough to participate in a large airdrop of a particular crypto (Decred), and instead of selling, I just decided to hold what I had and get out of the game. This was one of the best financial decisions I’ve made to date. It was some time later I stumbled upon Buffett’s investment philosophy that I stick to today:
Invest in things you know and believe in, and hold long term.
Buffett made his first $100,000 in about 5 years (between the ages of 21–26) by utilizing this one important strategy. He took the time to get to know the companies in which he would invest — in some cases traveling in person to speak with the leadership. When he was confident that the business was a good one, he would invest and hold, letting the company’s good business grow his wealth.
Why should investing in cryptocurrency be any different? Although I got out of the day trading scene in 2015, I stayed involved in the community. I got to know people, and I saw good business happen. And one day early this year I woke up to realize the airdrop I had received had grown by 18,066%.
Compounding interest works not only in the stock market, but in the cryptocurrency market as well. Since my initial success, I’ve invested in several other cryptocurrencies, platforms, and tokens. I was fortunate enough to have bought a decent share of ETH when it was worth about $8/ETH. Now it’s worth $80 (as of June 3, 2017 it’s worth $222). I have only profited because I followed Buffett’s example: research, buy, hold.
In addition to learning much of my philosophy from the Oracle of Omaha, I’ve gained practical advice from Tim Ferriss’ book Tools of Titans. If I can’t answer yes to each of the following questions, I don’t invest.
Here are the four questions I ask myself before any investment, adapted from Tim’s book:
- Do I understand the tech?
- Would I use the tech myself?
- Do I see other people using this tech in 3 years?
- Do I have any type of advantage investing in this token? (air drop, 2 for 1, etc.)
These four questions are the start of my research into the state of the company. Instead of traveling like Buffett to speak to leadership in person, I join the company’s Slack channel. I seek out leaders of the community and speak with them. In some cases, I’ve even been able to have phone conversations with leadership.
By asking these four questions and following Buffett’s two rules of investing, I have yet to lose money on any cryptocurrency investment. Will that trend continue? Who knows. It could all crash tomorrow, and I would be ok with that, because I only invest what I can afford to lose. In the meantime, I will enjoy watching my 5,982% (as of June 3rd, 2017 this number is up to 15,800%) return on investment compound daily.
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P.P.S This article was updated June 3rd, 2017 to reflect current portfolio values. At the time of publishing, my portfolio was worth $10k, ETH was worth $80, and my ROI was 5,982%.
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