"Price is what you pay. Value is what you get." - Warren Buffett

Benjamin Graham and David Dodd pioneered value investing in the 1920s. The core concept is to buy assets for less than their intrinsic value. Intrinsic value refers to an asset's true, underlying value based on a fundamental analysis of its cash flows, assets, earnings power, and prospects.

The goal of value investing is simple: to acquire assets at a significant discount to their intrinsic value, hold them as the market eventually recognizes and reflects their true worth, and sell when the price approaches fair value to realize a profit.

It’s buy low, sell high. But it’s a little deeper than that. In crypto, value investing requires betting directly against the hype cycles and trends.

"The individual investor should act consistently as an investor and not as a speculator." - Ben Graham

This requires a contrarian mindset of going against prevailing market sentiment to find neglected and underappreciated assets.

Value investing emphasizes investing with a margin of safety; buying at a price sufficiently below intrinsic value to allow room for error in your value estimation and unexpected adverse developments. If your analysis is correct and things go to plan, you should realize an outsized return, but if you're wrong or conditions change, the discount provides downside protection and reduces the risk of permanent capital loss.

Over long periods of time, value investing in the stock market has outperformed growth investing and generated strong absolute returns. But, it requires deep research, independent thinking, emotional discipline, and a long-term time horizon. And it demands patience that is antithetical to the tenets of traditional crypto investment - which, I have to be honest, have become more closely aligned with gambling than anything else.

• Think like a business owner, not a stock trader. Analyze the underlying business, not short-term price action.

• The market is there to serve you, not instruct you. Sentiment-driven price volatility creates opportunities.

• Always invest with a margin of safety. A bargain price provides both upside potential and downside protection.

• Be contrarian and invest in out-of-favor assets. The best opportunities are found where there is fear and pessimism.

• Stick to what you know and stay within your circle of competence. Invest where you have an edge.

• Be patient and invest for the long term. Don't focus on short-term price fluctuations. Time is the friend of the wonderful asset.

• View risk as the potential for permanent loss of capital, not short-term volatility. Seek to minimize the chance of incurring permanent losses.

• Think independently and be willing to go against the crowd. Have the temperament to handle being out of step with the market.

To a fair few folks, value investing will seem at odds with cryptocurrency investing. With assets that are highly speculative, exceptionally volatile, and lacking traditional fundamentals like cash flows or book value, crypto might appear to invalidate value investment.

But I don’t buy that. I believe the core principles of value investing can be adapted and applied to crypto assets. The key is to analyze crypto assets and blockchain projects as businesses - to look beyond short-term price action and instead focus on the underlying value drivers and long-term prospects. With the right analytical framework and mindset, it's possible to identify crypto assets trading at a discount to their intrinsic value.

Intrinsic Value - For crypto assets, intrinsic value is derived from things like the utility provided by the underlying blockchain (transaction throughput, smart contract functionality, etc.), the size and growth of the addressable market, the project's competitive advantages (network effects, partnerships, etc.), the quality of the development team and community, and the asset's monetary policy and supply schedule. Rigorous analysis of these factors can provide an estimate of a crypto asset's fundamental value.

The margin of Safety - The 50-80%+ drawdowns that even the most established crypto assets routinely experience provide ample opportunity to acquire them when they are on "sale" at a significant discount to fair value. The key is having the conviction to buy amidst extreme negativity after doing the research to determine whether an asset is undervalued. Buying at the point of maximum pessimism is how you get a margin of safety in crypto.

Independent Thinking - Crypto markets are rife with tribalism, herd mentality, and FOMO. Taking a value investing approach requires tuning out the noise, applying critical thinking, and making decisions based on your own careful analysis rather than getting caught up in prevailing narratives. Thinking and acting in a contrarian fashion is essential.

Long-Term Focus - With crypto, even more so than stocks, a multi-year time horizon is non-negotiable. Most people buying will attempt to make a mint on a pump and dump in a matter of days if not hours. That cannot be the path of the value investor. The immaturity of the technology and addressable markets means most blockchain projects will take 5-10+ years to play out fully. Investors need the patience and conviction to hold through the inevitable ups and downs along the way. Trying to time short-term price moves is a losing game.

Risk Management—Given the drunk-on-grain-alcohol nature of the tech and regulatory landscape, Avoiding permanent loss of capital is especially important in crypto. Many digital assets will likely end up worthless in the long run. Carefully studying what a project is building, pressure testing the investment thesis, diversifying across multiple assets, position sizing appropriately, and using smart contract security best practices can help mitigate risks.

There are some great examples of crypto investments that exemplify value investing principles:

• Bitcoin in 2015 after an 80% drawdown and the Mt. Gox collapse as adoption was inflecting and the market was overly pessimistic.

• Ethereum in 2019, when it was trading 90% below its highs despite major progress on network scaling and booming growth in DeFi applications.

• Solana in early 2023 as it provided superior scalability and speed versus Ethereum and a stronger community than L2s, at a fraction of the market cap, having dumped post FTX.

In each case, examining the fundamentals and competitive advantages of the underlying blockchain revealed the assets were undervalued by the market at the time. Investors who had the conviction to buy in those periods of fear and hold for the long term realized tremendous returns.

Value investing and cryptocurrency might initially seem like strange bedfellows. But I genuinely believe the time-tested principles of intrinsic value, margin of safety, contrarian thinking, and long-term focus are applicable and essential for successful crypto investing. The extreme volatility and rampant speculation in crypto markets create significant opportunities to buy assets at a large discount to their fundamental value. With the right analytical framework, mindset, and temperament, value investors can generate outsized returns in the high-risk, high-reward world of crypto assets.

This is not to say that value investing in crypto is easy - far from it. It's impossible without a deep knowledge of the tech, extensive fundamental research, contrarian thinking, and immense patience and discipline. But for those willing to put in the hard work, it is the most reliable path to long-term success and wealth creation in the crypto market. As the technology matures and the market becomes more efficient post ETFs, I expect we'll see more and more professional investors and firms applying value investing principles to the crypto space. Over time, crypto value investing strategies will likely produce some of the best risk-adjusted returns in any asset class.