The internet gave us a very broad platform to express our opinions. This is for the most part a good thing. People are able to share their views, collaborate and exchange ideas like never before. But in the middle of all that good there is a dark side.
I cannot go to any crypto chat room, or do a quick search on you tube without seeing a financial "expert" commenting on the market. crypto X is dirt cheap, crypto Y will double by the end of the month, crypto Z is very undervalued. Normally I would think all this information is a good thing, but that would be if all that confidence was backed up by data.
It's very easy to do a quick search and figure out what problem a cryptocurrency is trying to solve, how many github commits they have, how many partnership they have announced, how many telegram followers they have, their market capitalization, etc. It's also very easy to compile all that information and make broad generalized assumptions that will lead to you to believe that a particular crypto has untapped potential and that the price undoubtedly has to go up.
The problem is that the same way you don't want to rely on a google search or a message board for legal advice, and you don't want to be some one who read their first book on biology to take the place of your physician, you don't want financial advice from someone that has no financial background. Specially if they are the alpha type full of confidence and with good marketing skills!
The problems with all that data I mentioned is that they do not tell a financial story and give you no way to correctly identify if a cryptocurrency is over or undervalued. It's is just a way to market that cryptocurrency to you.
Starting with the economic premises of the tokens, which is rarely discussed by any of the "experts", and even when they mention it, it is only very superficially as if it was not really important understanding how did they came up with those conclusions.
Understanding what gives value to a token is the first thing you should know to be able to evaluate it. It is possible for companies to do phenomenally well after the ICO, and all that success have little impact in the value of token. Generalizations like "if the company do well and attract more users the token will go up in price, it's just basic supply and demand" are just not true, but get repeated like fact across every message board. On many of the new ICO's the token is not even required to operate in the platform. Some are given to users as a way to earn perks, or some other form of symbolic reward that really is not worth much as an investment.
Even after you know the basics and understand the token economic value it does not mean that your work is done. This is just the beginning. The hard work starts when you start putting together the financial model and making assumptions about user growth, the impact of regulations, sources of revenue and monetization, required rate of return, risk profile,etc. This is so you can estimate what is the fair value of a particular token is based on the available data, educated assumptions and a proper discount rate to account for the risk level. Without knowing that, you cannot say that a token is overvalued or undervalued. That's is because of the basic fact that something can only be overvalued or undervalue if there is a fair value in the middle.
All professional traders in the market that trade based on fundamentals thru value investing have a fair value target and will buy or sell based on where the current price is compared to that estimated fair value. They don't buy or sell because someone launched a testnet or because the CEO of a company is really pumping their stock. Off course, news matter to the extend that they change your assumptions and with that your fair value price. But the premises is that if you are investing as opposed to trading that you know what something is worth to you and is willing to bet that overtime the market will agree with you. If you don't have that base you are either gambling or trading and those two terms, which are also very frequently used together, really mean completely different things.
If a token goes down by 80% it does not mean that it is undervalued, the same applies the other way around. I haven't seen the first "expert" pull out a valuation model to back up any of their claims on valuation.
It get's even worse when they are promoting an ICO. If you ever bought an IPO you know what I mean. The price of an IPO is discussed for weeks or months prior to pricing, it requires a deep review of the company past earning and future earning projections, an analysis of economic factors, it generally involves a investment banking firm and a big four accounting firm. It is a process. Investors are given financial information for which to based their own decisions on price, which might not align with the company's. At some point the IPO happens and the market takes over.
How do Companies preparing for the ICO come up with the token price? worst yet, what do you get when you invest in an ICO that allows you to make a determination on the fair value of the coin? most of the ICO's are whitepapers with no history, they don't provide future projections other than marketing, they make you sign a large disclaimer saying that the tokens carry no rights and no expectation of profits. You get nothing that let's you make a fair value calculation, and that's intentional so they can avoid been regulated as securities. That's not to say that they don't end up being the best bargain of your life. But the "experts" telling you to buy it have not done that type of work to back their claims. Not because they don't want to, but because they don't know how to do it. So instead they give you the equivalent of a marketing brochure, tell you that the crypto is dirt cheap while at the same time disclaiming that they are not financial advisors and what they say is purely their opinion and for entertainment, which is kudos to them, not for the fact that people complete ignore the disclaimers and buy whatever they feed them as they were talking to their Goldman Sachs banker.
Chat admins and "loyal" fans on telegram used to refer from discussing price, but not anymore. Now there are crypto sponsored chats created exclusively to discuss price. The crypto is cheap at $10, it is cheap at $5, it is cheap at $1, and would be cheap at $500. there just is no criteria other than shameful pump. " Wait until the platform launches and it will go up ten fold". it could be, but can they tell me the basis for that assumption? off course not. And if I dare to ask again again I am a troll who just doesn't get crypto.
The best part for me is when people start quoting Warren Buffet to justifying holding crypto in the downturn. to Start Warren Buffet would not touch crypto, he said it himself, he went as far as saying that if he cold he would buy a long term put option (option to sell) every single cryptocurrency in existence. But that's not my problem, my problem is that the experts quote him out of context to justify a otherwise nonsensical claims. Warren Buffet is a value investor. when he says " the stock market is a tool to transfer money from the impatient to the patient" he does not mean HODL. he means that if you did your homework diligently and you trust that you know what the long term value of an asset is, buy when the price is low and hold until that assets reaches your target price. That's very different than buy and hold forever hoping that it will go up in price. There are tons of example like this where the people using the quotes from Warren Buffet or other financial experts, have no idea what they mean, and if they do is even worst because in that case they would be intentionally misleading their audience.
Guys, more than a blog post this is just a rant. At the end of the day just learn to do your own diligence, if you can't master fundamental analysis learn to trade with technical analysis. Listen to everyone but with the intent to gather information, not as the gospel. It is good to question their assumptions and if they can't answer you don't buy what they are selling.
Blockchain is here to stay, there will be plenty of opportunities in the future, just be prepared and be careful out there!
