Crypto Investing Strategies: How to Pick Long-Term Investments

In 1908, Henry Ford introduced the Model T, and automobile stocks went crazy.

At the time, autos were expensive luxury goods, built for the wealthy. Many were handcrafted in workshops, like furniture. Every auto company had their own design, so there were no standards, which made them difficult to repair when they fell apart, which they often did.

Even so, investors saw that automobiles were the next big bet, so there was great speculation around these stocks. Locomobile. Maxwell Motors. The Stanley Steamer. These were the hot stocks of their day, the Teslas of their time.

The industry was so young that no one knew who would survive. Companies with a good investor pitch might see their stock prices soar, only to crash when they failed to deliver. Many auto companies went public, despite a limited ability to actually make automobiles.

Slowly, investors began to understand that auto production was expensive: only companies that were well-capitalized, with mass production techniques, would survive.

Which is why the Model T was a game-changer.

Marketed as the first affordable automobile, it was durable, reliable, and easy to maintain. (Ford eventually got the price down to $260, or about $4,000 today.) It could handle rough roads without losing a wheel. Soon, Model Ts were everywhere, which made it easy to find parts and service.

Surprisingly, Ford did not go public in those early days: the company was privately held by Henry Ford and a small circle of investors. But the company’s success fueled a renewed boom around other auto stocks, as investors placed their bets on the “next Ford.”

This continued until the famous stock market crash of 1929, when the auto industry shrank into a few major players who could withstand the Great Depression (notably Chrysler, General Motors, and Ford). Most auto stocks plummeted, and their cars have survived only in vintage auto museums.

The investing principle is that in emerging industries, we must distinguish between companies with real value, and companies built on hype. Ford had developed something of real value: an auto company that could scale. Meanwhile, a lot of investors poured money into two guys in a garage.

If this sounds familiar, it’s because the crypto industry is in its early stages of valuation, where nobody is sure what to pay for anything. But there are long-term lessons we can learn from this time in history.

Survival and Consolidation

The U.S. didn’t need 100 different auto companies. It needed, like, three.

Today, the world doesn’t need 100 different blockchain platforms. It needs, like, three. If you’re starting a new blockchain platform today, it’s like starting a tiny auto company in 1908. How are you going to attract developers, to build more dapps, to attract more users?

The layer-1 battle has already been won: it’s Ethereum. This could change in the future, of course, but understand that blockchains develop huge economies of scale that become self-reinforcing feedback loops: more developers, more dapps, more users.

The principle is that over time, technology industries tend to consolidate among a few large companies. This certainly happened with automobiles, and it’s our investing principle with crypto (see our Guide to Sector Investing for more).

This is due to two things: survival (smaller companies are eventually crushed by the big ones), and consolidation (smaller companies are gobbled up by the big ones).

For investors, the principle is pretty simple: invest in the crypto companies that are clearly leading their category, and that seem to have a sustainable competitive advantage (as Ford did with its assembly lines and Model T economies of scale).

Look for: Daily Active Users, Market Capitalization, Transaction Volume, Total Value Locked.

Innovation and Scalability

We all know the stories of reigning tech companies that failed to innovate with the times: Kodak and digital photography, BlackBerry and mobile phones, Yahoo and search.

But what about the crypto companies that failed to keep up?

Bitcoin Cash, for example, was a spinoff project that tried to solve the primary problems of bitcoin. BTC is famously slow and expensive; BCH was supposed to be fast and cheap. But Bitcoin Cash didn’t solve these problems quickly enough, and today only a few BCH holders still believe in it.

Compare this with Ethereum, a good example of a company with an inferior technology (Proof of Work) that successfully pivoted to a better one (Proof of Stake). Ethereum is also slow and expensive to use, but has developed layer-2 scaling solutions that are making it faster and better.

Ethereum’s advantage comes from its network of active developers (who meet up regularly IRL around the world), its Ethereum Improvement Proposal process (which allows structured and community-driven innovation), and the humble leadership of Vitalik Buterin (its spiritual CEO).

Just as Ford was able to pump out 15 million Model Ts on its assembly lines, then reinvest the profits into further innovations, the best blockchains have a self-reinforcing feedback loop of good ideas and good execution, at scale. Invest in crypto companies that can innovate and scale.

Look for: Developer Activity, EIP Improvements/Proposals, New Features/Upgrades, Transactions Per Second, Gas Fees/Transaction Costs.

Economic Resilience

The Great Depression wiped out most of the automakers, and World War II forced the surviving companies to produce materials for the war effort. Those were dark days.

But the great gift these companies received was economic resilience: if they could make it through a prolonged depression and a world war, they could make it through anything.

(Well, almost anything: Chrysler got a government bailout in 1980, and GM went bankrupt in 2009. Nothing lasts forever.)

There is one benefit to all the ups and downs of crypto investing: the companies that survive have seen it all. If they can come out of a prolonged crypto winter with more user traction and more innovation, they’re a pretty good bet.

Meanwhile, thousands of crypto tokens shrink to near-zero prices with every market downturn. Some investors continue to hang on, thinking their fortunes will eventually turn around: the good old sunk cost fallacy.

While it’s not always a good idea to just invest in the top 10 cryptos by market cap, it is a great place to start your research. Look for tokens that have stood the test of time.

(Note: this is also a good reason to avoid investing in tokens too early, unless you have money to burn.)

Look for: Market Cap Stability, Reserve Funds/Treasury, User Retention, Historical Survival

Investor Takeaways

The auto industry is just one historical example, but there are many others: railroad expansion in the late 1850s, the 1990s dot-com bubble, and even the current hype around AI.

In each of these cases, investors saw the truth: these technologies were going to change the world, and there was a lot of money to be made.

The chaos came from not knowing where the money should go. Investors backed anything that sounded good, driving valuations sky-high.

Then came an inevitable collapse, where most companies didn’t pan out and investors were disillusioned with the whole idea.

But from the ashes of all those failed experiments rose a new set of superpowers: a few companies that would dominate the industry and rule the world.

So here’s the playbook for investing in technology revolutions:

• Look for early leaders: the two or three companies that are likely to dominate the industry. Usually this will not be obvious at first, but you should see some leaders emerging (as Ethereum has done in crypto).
• Invest in these companies early: then hold onto them long-term, through the inevitable ups and downs, occasionally spot-checking to be sure they are still holding their market lead.
• Watch for market agreement: Eventually, investors will start to agree on fair valuations for these companies; the most important metrics will follow. And – because you’ve held on for the long term – your investments should look quite handsome.
• Remain vigilant: Usually you’ll have a nice, profitable runway of several decades, before a new technology paradigm arrives to disrupt the old one. But keep tabs on your investments, lest you become the lazy incumbent.

By identifying early leaders, investing early, and holding for the long term, we are using time-tested investing principles that can help us build long-term wealth.

That’s an investing strategy that Henry Ford would surely approve.

Source