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John Engle
John Engle
Articles (604) 

Warren Buffett: Bitcoin Has No Value

According to the Oracle of Omaha, cryptocurrencies are all about speculation

December 28, 2020 | About:

Warren Buffett (Trades, Portfolio) has turned Berkshire Hathaway (BRK.A)(BRK.B) into a household name thanks to rigorous adherence to the principles of value investing. Through disciplined investment in and acquisition of best-in-class companies, he has built an enviable empire of profitable businesses.

Thus, it is hardly surprising that Buffett has grown increasingly critical of an asset class that has grown in popularlity, yet has no path to profitability whatsoever - cryptocurrency.

Speculation and gambling

Buffett has been a vocal critic of Bitcoin and its ilk for years. As a committed value investor, this is understandable - speculative asset class that does not produce or have any prospect of producing income is hardly something a value investor would get excited about. In a CNBC interview in May 2018, Buffett laid out the core of his criticism:

"You aren't investing when you [buy cryptocurrency]. You're speculating. If you wanna gamble, somebody else will come along and pay more money tomorrow. That's one kind of game. But that is not investing. If you buy bitcoin, you don't really have anything that has produced anything. You're just hoping the next guy pays more."

According to Buffett, Bitcoin is "an asset that creates nothing." In other words, Bitcoin's value is purely the product of speculation, with its price driven by the age-old Greater Fool fallacy.

Ignorance is dangerous

Buffett has long cautioned investors to stick to what they know. He is a noted evangelist for investing within one's circle of competence, a concept that involves defining and describing the bounds of an investor's particular knowledge set. As Buffett told CNBC in 2018, Bitcoin is well outside his circle of competence:

"I get into enough trouble with things I think I know something about. Why in the world would I take a long or short position in something I don't know anything about?"

The real danger of cryptocurrency speculation is that so many of the speculators know next to nothing about the technology underpinning it. To be fair, it is difficult to understand, which is one of the drivers sending Bitcoin to record highs - not only serious financial analysis but a thorough understanding of the underlying technology itself is necessary to even begin to get a true grasp of cryptocurrencies.

My verdict

I agree with Buffett's assessment that Bitcoin is even worse than an overvalued tech or biotech stock, which investors anticipate will one day become profitable, as Bitcoin by its very nature will never become an earning asset in its own right. That fundamentally disqualifies cryptocurrency as a worthwhile asset class according to the Buffett school of investing thought.

In my assessment, investors with exposure to bitcoin should do their homework and consider whether it or other cryptocurrencies can genuinely become viable alternative currencies. There is little sign of such developing maturity as yet, so for now it is all speculation.

My recommendation to investors is to heed Buffett's advice and give Bitcoin – and all cryptocurrencies – a wide berth.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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Comments

premium member - 3 months ago - Edit
bitcoin is not intented to create value, but to store it, therefore conventional valuation models cannot apply, similarly as with other currencies. It is definitely a disruptive technology which is not controlled by any central institution or individual, which makes it "one of a kind". That is bitcoin's value proposition. Its rareness and uniqueness, combined with its robust and predictable applications. Something to consider for a small and affordable% of your portfolio. As Monish Pabrai notes in his book "The Dhandho Investor: heads you win, tails you don't lose much". Bitcoin is a social movement, and history has told us how powerful that can be.. I agree to disagree with Warren on this one!
stephenbaker
Stephenbaker - 3 months ago    Report SPAM

How does Bitcoin store value? As Buffett says, it does not create (or generate) anything. It is not backed by anything (or any government) and I can't spend it but for a few vendors who are gambling that they can sell it for more tomorrow than what they get today. By definition something that stores value does not wildly fluctuate in price. Any "value" looks to be the greater fools theory. What am I missing?

hallanthony008
Hallanthony008 - 3 weeks ago    Report SPAM

Hello! There is a website mixer-bitcoin https://bitmix.biz/en it accepts the cryptocurrency of many people, then uses algorithms to mix and send bitcoins to different wallets. That's why the name mixer is so funny. But it really works and everything is anonymous. There is no identification.

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