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Using Warren Buffett's Advice to Understand the Crypto Market

·3 min read

- By Rupert Hargreaves

How should the average investor, one who does not know a lot about technology, approach the cryptocurrency and DeFi market?

With every day that passes, it seems that this industry becomes more and more developed. Big names in the world of finance are now taking an interest, including Ray Dalio (Trades, Portfolio), Daniel Loeb (Trades, Portfolio) and Carl Icahn (Trades, Portfolio). If these financial sector heavyweights throw their weight behind the industry, its development could accelerate rapidly.

The challenge for investors

This presents an interesting challenge for investors. If cryptocurrency and blockchain technologies are the future, should we be looking for investments in the sector that may benefit from this trend?

This question is not just related to cryptocurrency and its related technologies. It is applicable to all new technologies.

From autos to laptops, cloud computing to fracking, when a sector looks as if it is the next big thing, investors always have to deal with the tough choice of whether to get involved or not.

Whichever sector one chooses, there will always be compelling arguments as to why it is the future. There will also be compelling arguments on the other side.

Fracking is a great example. Five years ago, this technology was the future for the oil industry, and money rushed into the sector. Today, not only is the fracking sector a shadow of its former self, but the whole oil industry is under threat from the green energy revolution.

At this year's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting, Warren Buffett (Trades, Portfolio) presented information that showed that in the early 1900s, at least 2000 different companies entered the auto industry, but by 2009 there were only two left. Two of which went bankrupt.

"So there was a lot more to picking stocks than figuring out what's going to be a wonderful industry in the future," he summarized.

I should make it clear that Buffett has repeatedly stated that he does not support cryptocurrencies, and these comments were made in relation to the auto industry, not digital assets.

However, whether it be auto stocks or cryptocurrencies, the principle is very similar. Picking winners in a sector or industry is much more complicated than predicting which sectors or industries will succeed.

There are some very interesting and revolutionary ideas in the pipeline of the crypto and digital asset world, but there's no telling which of these will succeed. Some cryptocurrencies might still be around 10 years from now. Others may not.

Bitcoin may be around 10 years from now, or something more useful may have replaced it. There are plenty of cryptocurrencies on the market that could take its place, and the number is growing every day.

Every single stock on the market has its bulls and bears. It is the same with cryptocurrency and other digital assets. There is always going to be one party who has a positive view and one with a negative view so stripping back the noise and getting to the real argument is challenging.

To put it another way, I do not think the cryptocurrency complex deserves to be treated any differently from traditional assets. Some cryptocurrencies might produce huge returns. Others may not.

Picking winners in the sector is going to be incredibly challenging. I have been approaching the market in the same way I approach any other stock. I stay away from what I do not understand.

Sure, I might miss out on some profits as a result, but investing in what one knows and understands is a proven strategy. Throwing money at an asset and hoping it will become the next big thing is more speculation than anything.

It is very difficult to make money as a speculator and a trader consistently.

Disclosure: The author owns no share mentioned.

This article first appeared on GuruFocus.