Long term investors for publicly or closely held companies hold on their investments for long and enjoy streams of dividend distribution and from price appreciation for their funds; they believed in the management and the value of the company is still undervalued in comparison to its value in the general market, this value is called the ‘intrinsic value’.
Legendary investor, Warren Buffet, described intrinsic value as an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value is not so simple.
Companies use estimates or professional judgement in valuing most of their assets and in their forecasts of the future cash flows which may be adjusted every time, intrinsic value is then not more of a precise figure.
Therefore, in order to calculate the intrinsic value of a financial institution, we can use the company’s annual reports and make a general estimate of their current value and the average performance from the past three to five years then compare it with the market valuation if its undervalued or overvalued.
In addition, to their annual reports we can also analyze if their products can last 50 years from now and their management team and their overall direction.
Buffet criticizes cryptocurrencies negatively outright commenting that the value brought by these products is just a ‘joke’.
First, the basis for calculating intrinsic value for this type of companies can be nearly impossible since they are unregulated industry and they do not submit any kind of annual reports to specific authorities such as the SEC for monitoring by the government and the general public.
Annual reports are very essential when valuing the businesses.
Second, cryptocurrencies have prided their products even if they are half-baked and have yet to prove their real world application tied with announcement of their partnerships with big institutions, thereby, causing so much wild swings allowing long term investors to be so cautious.
However, Japan Bank Consortium announced last year that their costs reduced by almost 60 percent using Ripple’s technology (another altcoin) but did not specify if they will be using the cryptocurrency itself or just the blockhain technology behind Ripple.
In those days, there has been no announcement to clarify things up but investors are clearly vigilant because there has been no indication of the cryptocurrency itself being used as a medium of transaction.
To conclude further, products of these blockchain projects have yet to prove if they could last for decades or the generations to come since many of these companies established themselves just for trading and not really to stay in the long run.
Finally, management transparency is very important since we can put a value to the company if the top leading team behind the company is trustworthy and has the capacity to propel the mission and vision working starting from the bottom of the organization.
Since no one really owns this industry, a lot of coins have undisclosed management or the developers behind these coins such as the mother coin which was founded in a pseudonym, ‘Satoshi Nakamoto’.
What if something goes wrong? There will be no figure heads that we can run after.
We may not be able to calculate their intrinsic value right now but we may be able to put value of the technology behind this projects and some of their applications of modern day companies such as in the industrial, energy and technology sectors in cost cutting and information systems management.