How to Apply Warren Buffett and Charlie Munger’s Value Investing Principles in Crypto

Hello everyone!

Recently, there’s been a lot of discussions around market capitalization, FDV (Fully Diluted Valuation), token unlocks, and more. While there are varied opinions about these topics, I’ve noticed that many investors, especially in the crypto space, focus heavily on technology and potential, without considering key value investing principles that have long existed in traditional finance.

In this blog, I will share a few lessons I've learned from value investing in stocks, specifically from Warren Buffett and Charlie Munger, and how I apply these to crypto investments.

1. Investing in Newly Listed Projects

Investing in newly listed crypto projects is quite similar to investing in companies going through an IPO (Initial Public Offering). Both are risky ventures, but let’s break it down further:

• IPO Risk: Value investors like Buffett often avoid IPOs, as the price of shares is usually inflated due to market hype and FOMO (Fear of Missing Out). The stock price often reflects optimistic valuations far beyond the true value of the company.
• Newly Listed Tokens: Similarly, in the crypto world, new listings often see a massive surge in market cap, as retail investors flock to the project. But in most cases, these projects are priced at overly high valuations. This happens more often in crypto due to the viral nature of news and investor fascination with storytelling over real value.

Key Takeaway:

For new crypto projects, it’s often better to wait until the dust settles. Once the initial hype wears off, the project’s true value will become more apparent. At that point, you can combine this insight with volume analysis to make more informed investment decisions.

But remember, a new listing doesn’t always result in a price drop. The critical factor is how the market values the project and its fundamentals at that specific moment. Even a well-priced project can underperform in a bear market, as we’ve seen during the 2021-2022 cycle.

2. Understanding Token Unlocks and Inflation

Warren Buffett’s investment vehicle, Berkshire Hathaway (BRK), is a great example of how disciplined management of equity can maintain long-term shareholder value. At the end of May 2024, Berkshire's stock was worth approximately $560,000 per share.

Principle: "Conservative Share Issuance"

Buffett’s approach emphasizes preserving the value of existing shareholders by limiting stock splits and carefully managing share issuance. In contrast, many companies dilute their shares, diminishing the value of existing shareholders.

• Token Dilution in Crypto: In crypto, unlocking tokens works similarly to issuing new shares. Token unlocks increase the circulating supply, diluting the value of the tokens held by current investors.
• Balancing Unlocks: It’s essential for projects to balance token unlocks, ensuring that development teams, VCs, and early investors are incentivized while maintaining the long-term health of the project.

Example:

Consider a project where you hold 11,000 tokens, which amounts to 1.1% of a 1 million token supply. If the project unlocks more tokens and the total supply grows to 1.1 million, your stake shrinks to 1%. This reduction in stake affects both voting power and the market price of the tokens.

Key Takeaway:

When evaluating a project, pay close attention to its tokenomics. Projects with well-structured unlock schedules (e.g., unlocks tied to ecosystem growth like airdrops, developer incentives, hackathons, etc.) are more likely to retain value over time. In contrast, projects that unlock large quantities of tokens purely for developer incentives risk creating sell pressure and price crashes.

3. The Impact of Token Issuance in Bear Markets

During bear markets, the impact of token unlocks can be even more severe. Projects that are already facing low demand and low market valuations may see further price drops when they unlock tokens, as these newly released tokens flood the market.

Key Takeaway:

In crypto, as in traditional finance, projects that protect long-term value by avoiding aggressive dilution tend to fare better. A project’s token issuance should align with sustainable, long-term growth rather than short-term token price gains. Unfortunately, many crypto projects fail to adhere to this principle.

Conclusion

Warren Buffett and Charlie Munger’s investment principles emphasize long-term thinking, fundamental analysis, and avoiding unnecessary risks—all of which can be applied to the crypto market. Whether investing in a newly listed token or evaluating a project’s tokenomics, always ask yourself:

• Is this project’s value inflated by hype?
• How will upcoming token unlocks affect my investment?
• Is the project designed for long-term success?

In the next post, I’ll delve deeper into two more critical lessons from Warren Buffett: investing with discipline and focusing on the development team behind projects.

Stay tuned for Part 2!

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