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The Crypto Price Valuation Challenge

Feb 16, 2018

Describing cryptocurrencies in their current form as volatile is a significant understatement. Due to a lack of a long-term financials for traders to analyze, many investors have been hesitant to invest in these assets. Is it possible, however, that a shift away from a fundamental focus can actually lead to improved portfolio performance? This is a concept explored by Tom Goldenberg in his piece “The Hard Thing About Crypto Price Valuation”. After a quick review of historical returns, the case certainly gains steam.

A strong focus on fundamentals has long been regarded as essential for successful investment, but just how predictive are they of a stock’s value? To determine the relationship between strict fundamental investing and portfolio returns, an algorithm was created to test the performance of a fundamentally centric portfolio. The results were less than encouraging. The portfolio underperformed the S&P 500, representing average returns, by an astonishing 155 percent. While fundamentals should not be discounted in investment decisions, relying on them as the sole source of data has proven to be less than optimal.

Based on this outcome, lacking a classical foundation may not have to be a nail in the coffin for cryptos. There are multiple ways in which cryptos can be evaluated without needing to rely on established fundamentals. They can be assessed on factors such as trading volume or the number of active users daily, which can be indicative of the staying power of particular cryptos. Cryptocurrencies represent a significant avenue for wealth creation. For investors to simply discount them for their lack of tradition would be a disservice to not only themselves, but to their portfolios as well.

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