Warren Buffett is famous for his patience, as well as his sharp focus on finding investments that are priced at the right valuation, and equipped to continue gaining in value for years and years. Something he isn’t as famous for is that he detests all forms of cryptocurrency, even Bitcoin (BTC -0.09%).
But that doesn’t mean you can’t apply some of his investment principles to evaluating cryptocurrency investments. In fact, it’s probably a smart idea to take his perspective, at least with some assets. Here’s what you’ll need to do to get a more Buffett-esque twist when you’re looking at crypto.
1. Commit to holding for a very long time
Many of Buffett’s best investments have been a feature of his portfolio for many years. Take Coca-Cola, for example, which he bought in 1998, or American Express, which he first purchased in 1991. There aren’t any cryptocurrencies with that kind of vintage of being in existence. The closest would be Bitcoin, which was launched in 2009.
The point of Buffett holding investments for so long is that it allows the company’s competitive advantages to play out and increase the stock’s value as it inevitably wins against its competitors over time. That way, he gets the benefit of compounding growth, and someone else is doing the work each day to make it happen.
You can use this same idea very easily: Which cryptocurrencies, if any, have drivers that’ll sustain their growth for years to come? As mentioned before, the only coin that’s been proven to do that over any period of time that’s sufficiently long to be Buffett-approved is Bitcoin. Others might achieve this eventually, but for now, it’s the only one with enough of a history, and it’s the only one with supply dynamics that are likely to continue forcing its price upward over the long term.
2. Buy assets when they are priced cheaply
Buffett is a stickler for buying stocks at an appropriate valuation.
In crypto, this equates to not buying assets when everyone is talking about them and sentiment is high. There is minimal focus on the underlying investment thesis and more focus on price action. It’s rarely a good deal to buy coins that are actively being bid up.
Instead, take Buffett’s approach. You don’t need to try to time the market. You just need to make sure that you’re not buying at the points of a coin’s life when there’s a baked-in hype tax. If there’s a real mechanism by which the coin can generate value over the long term, and not just hype, it’ll recover from any lows that its price hits anyway.
So be patient and invest slowly, preferably while prices are nowhere near their recent highs. For Bitcoin, a perfect example would be buying in early 2023, right after the bear market.
Take a look at this chart:
Bitcoin Price data by YCharts.
It’s fine to buy as prices are rising, as long as you’re diligent about dollar-cost averaging (DCAing) when prices are falling too. It’s more important to be invested for the long haul than it is to nail the perfect dirt-cheap valuation entry that Buffett tries to do with stocks. The science of crypto valuation isn’t nearly as mature as stock valuation, so aim for being in the right ballpark rather than hitting the bullseye.
3. Be selective about whether to invest in anything at all
Buffett has a lot of different holdings. But he doesn’t buy stocks every day. He screens annual reports, calculates valuations, determines if there’s an asset worth owning, and then patiently waits for the opportunity to purchase it at his preferred price. That means doing nothing most of the time. And it means not buying something that looks juicy until he sees signs that the fruit is actually ripe.
You should be taking a similar approach with cryptocurrencies. There is no rush to buy anything that is worth holding for more than a few years. Today may not be the right day to invest in something, given your capital, your portfolio’s positioning, and your current level of risk exposure. The more deliberate you can be, the better your results will be.
American Express is an advertising partner of Motley Fool Money. Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
