The current investment landscape is a rugged one for businesspeople and investors seeking value.
Stock market valuations often seem disconnected from company earnings statements. Interest rates are near all-time lows. And real estate values have rebounded in most of the US—leaving individual real estate investors and flippers scouring neighborhoods and tax records to find motivated sellers.
If you’re an investor who focuses on trends and momentum—or a buy-and-hold landlord—then you’re probably content with the current state of affairs, but for those of us looking for exceptional value plays to include in our portfolios, true bargains are few and far between.
Sure, there are certainly still publicly traded companies out there that fit a value investor's criteria—and you can find them if you look hard enough. But for disciplined, value-focused investors, great investment opportunities are few and far between.
Yet, there’s an entire asset class out there that you may never have heard of. One that remains untouched by institutional investors and grossly undervalued when compared to the wider investment universe.
Welcome to the world of digital assets, where you can buy assets at 20x monthly earnings (equivalent to a PE of 1.6), and where ROIs of 50 percent (or even over 100 percent) are pretty commonplace if you possess a modicum of digital know-how, filter the choices according to a set of hard-and-fast criteria and do your due diligence.
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So, What Exactly is a Digital Asset?
Digital assets are also occasionally referred to as web properties or digital real estate (the jargon hasn’t been formalized yet because not many people know that this kind of asset even exists). Essentially, a digital asset is a website that makes money.
While there are many ways that a website can be monetized (advertising, affiliate offers, drop-shipping, e-commerce, SAAS, etc), all of these types of sites can be classified as digital assets.
A digital asset is any asset that:
- Generates earnings
- Isn’t connected to any brick & mortar store or office.
Buzzfeed is one example of an extremely successful digital asset. Buzzfeed primarily makes money off advertising and isn’t tied directly to any traditional newspaper or magazine. This site represents the pinnacle of what a digital asset can grow into.
Why Should I be Interested?
To put it simply, because not many people know about digital assets (and because most people who do know about them tend to be online entrepreneurs as opposed to investors), the entire asset class is extremely cheap. Valuations tend to range from 15x monthly earnings (equivalent PE ratio: 1.25) to 35x at the high end (equivalent PE ratio: 2.9). Compare that to historical PE of the S&P 500, which works out to be around 15. Currently, the S&P 500 has an average PE of about 20.
If you go to the most popular website marketplace, Flippa.com, you’ll find many websites selling for 15x-25x monthly earnings. That equates to yields of 45-80 percent. Popular brokers like Empire Flippers often sell sites for about 20x, equivalent to yields of about 60 percent.
What’s the Catch?
Granted, this kind of apples-to-apples comparison isn’t entirely appropriate. Equities are well regulated in most of the developed world, and investors are generally well protected against fraud. Equities are also more or less passive investments (unless you’re a wealthy, activist investor). There are certainly drawbacks to investing in digital assets when you compare them to more traditional investments—here are a few:
- Investing in digital assets requires you to learn a specific set of skills unique to doing business online. Without these skills, due diligence becomes impossible
- Digital assets need maintenance, even if it’s just a few hours a month. Also, the amount of upkeep can vary considerably—if you invest in a static, informational site, maintenance might just be an hour or two a month, but if you buy an e-commerce site, it may require a considerable amount of time and effort to operate.
- The buying and selling of websites are relatively unregulated. It's a Wild West type of market, teeming with scammers eager to prey on unsuspecting first-time investors. Also, many of the transactions are cross-border, meaning that if you do get scammed, it is next to impossible to seek legal remedies.
- Accounting laws and best practices don’t apply (for the most part) to digital assets, and it’s not uncommon for sellers to over-report profits or under-report costs.
- Whereas real estate purchases and loans are secured by deeds and deeds of trust, no such security instrument or broadly recognized legal standing is attached to equity (or priority of ownership) in a digital asset.
While these risks are not insignificant, savvy investors can turn the barriers to entry to their advantage. If you’re willing to put some time and effort into learning the due diligence skills and methods necessary to succeed, you’ll have access to a new (and potentially extremely profitable) asset class that is largely ignored by traditional investors.
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How You Should Think About Digital Assets
In a sense, the digital asset space is the ultimate frontier market. It's sort of analogous to where Brazil stood on the international investment scene a generation ago—a massive, burgeoning economy that was opaque and inaccessible to most investors.
As with emerging foreign economies, the rules are different in this investment landscape: The opportunity to achieve marginal returns is balanced by a challenging learning curve, valuation and due diligence processes that'll require patience, savvy and potential outside (paid consultant) expertise . But those investors who do figure how to navigate frontier markets open up staggering growth potential.
The digital asset investment space is, essentially, a frontier market that's open to anyone, from anywhere in the world. That's what makes it so exciting—and that's also what makes it so tricky to navigate.
From a broader investment perspective, digital assets are also interesting because they don’t correlate to traditional investments—thus, if properly researched, they can represent a good way to build diversification into a portfolio that is heavy on stocks and bonds.
While I’m not advocating allocating a huge percentage of your capital into digital assets (especially not if you’re a beginner), digital real estate is a value play that is worth considering for your investment portfolio.
OK, I’m Interested. Where Can I Learn More?
Here are some useful resources for investors interested in learning more:
Image via Wired Investors
Wired Investors is a great resource if you’re trying to learn more about buying and selling websites, especially if want to take a more methodical, investment oriented approach. The site focuses a lot on doing proper due diligence.
Furthermore, I recommend the two big guides that they have:
Image via Flippa
Flippa is one of the most well known website marketplaces and provides a blog with informative tips for both buyers and sellers.
Image via Empire Flippers
Empire Flippers is a website brokerage that lists sites between 3,000-50,000 (although there are certainly listings that are priced well over 50,000). On top of the brokerage business, Empire Flippers also runs a blog and a podcast.