At a recent Berkshire Hathaway annual conference, superstar investors Warren Buffett and Charlie Munger came out and doubled down on their claims that cryptocurrencies, specifically Bitcoin, are “rat poison squared.” They even went so far as to compare cryptocurrencies to animal droppings.
Meanwhile, at the Milken Institute conference notable economist, Nouriel Roubini called Bitcoin a “scam.”
Milken Institute Panel Discussion with Nouriel Roubini, Alex Mashinsky, Bill Hardyt & Brent McIntosh
This is not the first time that Buffett and Munger have made such statements; however, Buffett has been particularly outspoken about his negative views on cryptocurrency for quite some time now. In addition to considering it “poison,” Buffett has, in the past, decried Bitcoin as being a sort of “fool’s gold” and something that is in a “bubble.”
Although Buffett and Munger have years of experience “beating the market” and being stellar investors, their snobbish outlook on cryptocurrencies are unfounded.
Bitcoin “Produces Nothing”
One main argument that Buffet has against Bitcoin, and by extension all cryptocurrencies, is that they “produce nothing.”
To debunk this, let’s begin by comparing Bitcoin to Apple stock (AAPL). Apple is a “platform” company that produces hardware, software and services. Their products are real-world assets that are worth money.
Bitcoin, on the other hand, does not generate any physical assets in and of itself, i.e. it doesn’t produce any physical items or services that can then be sold on the open market. What it does instead is create a “platform” that enables individuals to transact with anyone around the globe using a digital asset called BTC. This transaction takes place without a middle-man or a toll collector. Instead, Bitcoin incentivizes its users to “mine” it and grow its network.
The same can be said for Ethereum, which transacts using ETH digital coins. ETH however, has a few additional features such as the smart contract feature. These contracts can best be described as predetermined, single-purpose, immutable, distributed, coin-operated, cloud-based vending machines that can be programmed to perform tasks using ETH as a currency and a store of value mechanism.
Thus, Bitcoin, and other digital coins may not produce anything but they permit exchange and facilitate value vicariously.
Side note: the concept of a rogue currency is not unheard of in human history. The USA started out as a bunch of colonies who minted their own “$ coin” against the laws and rules of their British monarch and ended up as the reserve currency of the planet. There is no reason BTC or ETH cannot do the same if everyone start using them.
So, currencies, and the various objects used as currencies throughout mankind’s history, typically do not produce anything by themselves. Instead, they are merely a means of exchange that permits the transmission of value across a wide and complex network of people and businesses.
By the way, Apple went public in 1983, yet Buffet waited over 30 years — until 2016 to invest in it. So, other than the fact that Buffett may not understand how Bitcoin, without producing anything creates value, he may not be an all-knowing market savant anyway.
Cryptocurrencies Are “Not Physical”
Let’s consider an alternative investment like “physical assets” such as gold or diamonds, which Buffet talks about a lot.
According to Buffett, a “physical good” equals “value.” However, as per his previous dismissive claim that something ought to produce something in order to be valuable, gold fails that measure because it too “produces nothing.” In fact, it costs a lot of energy and pollution to “mine” gold, and there are high security and storage costs associated with it.
Sound familiar?
What makes gold valuable is its limited supply, and like it, Bitcoin too is a rare asset in limited supply that is in demand and therefore has value by itself. It does not need to create anything else beyond itself in order to be valuable. A company like Apple, on the other hand, does need to produce something (mostly profits) in order to be valuable.
Bitcoin Is A “Pyramid Scheme”
Another well-known claim that Buffett has made against Bitcoin is that the only reason it has value is because people buy into it first (with actual cash) with the intent of selling it later at a higher price. Aside from this, according to Buffett, it has no value and will eventually run out of steam once the supply of new buyers dries up.
Let’s give him the benefit of the doubt when we take a look at this argument.
First, it is true that a (large) number of individuals and businesses that get involved in Bitcoin do so purely to speculate. And by that, we mean just what Buffett said, to buy at a low price and sell at a higher price at a later date. With any investment, speculation is inevitable.
During the first internet bubble, there was rampant speculation, but companies like Priceline, Amazon, Expedia and others also came out of that era of speculation. Thus speculation can both be harmful and helpful, depending on market conditions.
For instance, real estate speculation is normal and can help market prices steadily grow over time. If it becomes rampant, then it can destroy real estate markets by raising prices so high that no one wants to live in a highly speculated area anymore. For some examples of this, take a look at the real estate market in Vancouver or Shanghai. This kind of speculative bubble is then usually followed by a crash and then a market correction.
Let’s compare this to the infamous price explosion that Bitcoin and most cryptocurrencies experienced between December 2017 through early January 2018. Bitcoin prices went up to its historic all-time high of just under $20,000 in a matter of days. This rapid explosion in price was met by a sharp drop as the speculative bubble burst. First, prices dropped to the mid $6,000 range, and since then have been slowly stabilizing back to the $9,000 to $10,000 range of today.
This kind of activity is a normal side-effect of speculation. It is, in many ways, inevitable and has been documented for decades as the “hype curve.” So, Buffett does have a point that Bitcoin is currently, in many ways, driven by speculation and if we do not cross the “early adoption chasm,” the whole thing may collapse. However, it is not purely a speculative asset. Instead, it’s one of the best means of transacting value available today.
In fact, cryptocurrencies are currently the most flexible, fungible and arguably most-advanced means of transferring wealth around the world. An ever-growing army of individuals, shops and businesses are getting involved and accepting cryptocurrencies as payment. On the banking side, major players like Goldman Sachs announced that they too would be getting involved in Bitcoin, and others are following suit.
As Warren’s best friend Bill Gates says, “most overestimate the impact of new technology over its first 5 years but underestimate its impact over 10 years.” So, Warren might just be underestimating Bitcoin right now.
Crypto is The Missing Piece of the Puzzle
Whenever Warren Buffett or other “old school” financial players, like him, make statements against cryptocurrency, their statements are often quickly rebuked by the crypto community. Although guys like Warren may come from a time when the world of finance was more “tangible” than “digital,” the fact remains that the fundamentals of investments are still the same. Therefore, it’s important to listen to the advice of experienced individuals, like Buffett, but it is also important to take their opinions and viewpoints with a grain of salt.
So, while Buffet’s arguments may be technically accurate, they do appear to be missing the point about why we need digital currencies. Buffett should look beyond trying to figure out whether crypto is currently in a speculative bubble or not, but realize that it may be the missing piece of the puzzle that can take the world economy to the next wave of growth.
Here are some scenarios for you.
Imagine 7.5 billion people transacting with each other using digital currencies that are not issued or controlled by any specific nation. Imagine the 5.2 billion people who are not part of the middle or upper class improving their lives and contributing to the world’s GDP.
Milton Friedman, the famed Nobel Laureate, predicted in 1999 that after the Internet, we will have a new wave of “E-Money” and he was right.
Digital currencies and the global tokenization of assets can unleash a new “digital industrial revolution” which will dwarf the Internet because of the amount of people it will impact and the financial and the intellectual freedom it will unleash. The winners here will be much bigger than Apple or Buffet.
Bitcoin is the Second Coming of the Internet
In 1993, the Internet was only available in 8 US universities and it looked like an academic experiment gone bad that the government had spent billions of dollars on. I don’t remember Buffet investing in any of the great companies that emerged from that tsunami of innovation.
That being said, Bitcoin is not like anything we have seen before — not a currency or a company, and it’s also not just a speculative asset. It’s an entirely new financial paradigm that was previously unimaginable, and only in the last few years or so, has it become a reality. But just because it is relatively new, cryptocurrency is not “rat poison squared.”
It does, however, have a long way to go, and a lot more growing left to do to fulfill the promises of bringing about an entirely new economic paradigm no longer predicated on the “too big to fail” toll collector banks and centralized financial institutions like the FED.
So, yes these new “digital platforms” may have never existed before, but it is impossible for anyone to predict if they are the next big thing or animal droppings.
The cryptocurrencies are a tool humanity can use to create a lot of good and make the world a better place or we can fumble this opportunity and let the central banks control our wealth unfairly.
I vote to place our bets with cryptocurrencies.