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How to develop a crypto investment thesis
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If you've invested money in crypto, it might be time to look at developing a crypto investment thesis. In this blog, we'll guide you through exactly what an investment thesis is and how you can use one to support your crypto endeavours.
What is an investment thesis?
Like many of the strategies and tactics you can use when investing in cryptocurrency, the investment thesis is something borrowed from the traditional investing world.
An investment thesis provides an overview or game plan to help an investor understand options for the asset so they can decide whether to invest in it and how to manage the investment over time.
How to use an Investment thesis
In traditional investing, an investment thesis usually has one of two uses:
- For a specific stock.
- For a private equity firm assessing whether to buy a company and add it to its investment portfolio.
The use of the thesis in each scenario is different.
In the case of a stock intended for purchase by individuals, the thesis can provide both an overview of the stock’s likely performance, as well as how to manage the investment over a period. For example, whether to use a short-term or long-term investing strategy for the stock.
In the case of a private equity firm, the thesis is used to assess the viability of a company, its performance and how it might provide a benefit to the investment firm’s portfolio.
The thesis should provide a clear statement of how the company and its own investors will benefit from adding the prospective company to its portfolio.
Using an investment thesis for cryptocurrency
Before you create any investment thesis for a cryptocurrency, it's important to keep in mind key factors that affect the general state of the crypto market.
Crypto is far more volatile than the traditional stock market. The example we frequently use to illustrate this is the massive rise and fall of Bitcoin in 2017, when it started at about 900 USD and climbed to almost $20,000 in late-December – only to lose 30% of its value in days.
So, keep the reality of the market’s ups and downs in mind when you create any kind of thesis.
Crypto is still young
Just like the crypto market is more volatile than the traditional stock market, it is also much younger.
The most valuable and oldest cryptocurrency, Bitcoin, has only been around since 2009. This short life so far means there is far less data to assess the performance of a currency over time, which makes it harder to utilize data to forecast its performance in the future.
Now, when it comes to an investment thesis, this short lifespan might not be as problematic as it is for applying other traditional investing strategies to crypto, because stocks for certain companies—particularly tech companies—might be hard to assess because there is no to little data for a company like it in the marketplace.
However, there is still always the stock market history itself, which has decades of history behind it.
Cryptocurrencies are not Stocks
Stocks are shares of a company, and a company provides a specific good or service and has a cash flow. Cash flow helps with valuing stocks, and cryptocurrencies’ lack of cash flow make them difficult to value.
Currencies are typically an output of a blockchain network, so their value must be assessed differently than if they were stocks.
Factors to consider
You may develop your own assessment criteria before developing your investment thesis, but there are several topics that you should keep in mind and consider as part of your criteria.
A key factor to consider when assessing a cryptocurrency is the service that the blockchain provides. That service can be both an indicator of the currency’s potential performance, as well as a way to position the currency as a potential investment.
A good example is Ethereum, whose currency Ether (ETH) has gained value primarily because of the value of its service: smart contracts.
Smart contracts enable people to execute contracts digitally, without the involvement of a third party. Many industries, including those in the traditional financial markets, see tremendous value in this technology.
Another example is EOS, which allows developers to build decentralized applications on its network. EOS had its ICO in January of 2018 and it is already one of the most valuable currencies in terms of market cap.
Of course, the granddaddy of all cryptocurrencies, Bitcoin, has had its own value grow out of the fact that it was the initial peer-to-peer blockchain network, enabling people to exchange money without the aid of a third party.
A cryptocurrency’s past performance can be essential to evaluating its future value. With Bitcoin, being aware of that fluctuation in price can be crucial to presenting a thesis about future value. The same can be said of cryptocurrencies a few years old.
Change in value
Just like with a stock, a currency’s change in value—an increase or decrease—could trigger a reason to invest in it. For example, in 2017, as Bitcoin began its rise to 20,000 USD, it could have been advisable to include in an investment thesis that the currency was gaining popularity and increasing in price.
Value per coin
While most stocks are assessed by their price-per-share, cryptocurrencies are unique in that their overall value is measured by market cap, yet the number of coins of a cryptocurrency can vary greatly, and so the cost per coin is determined not only by the value of the currency but by the number of coins on the market.
These types of variations in per-coin value might affect your thesis, in terms of analyzing how an investor might think about the currency or purchase it—by per-coin value or overall market cap.
Building a thesis
Once you have identified the assessment criteria you want to use for your thesis, the next step is to turn your findings and predictions into a written document. In the process of doing this, it's important to consider your audience.
If your thesis is just for yourself, you need only to consider how you investing in the currency could benefit for your overall crypto portfolio. If you’re writing a thesis for the public, you will want to prepare the thesis to provide recommendations to people you do not know who are trying to decide about whether and how to invest in the currency.
However you use a crypto investment thesis, it can be an incredibly valuable tool to help you understand the pitfalls and promise of a potential crypto investment, helping yourself – and others – decide whether to add the currency in question to a portfolio.