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.
Read more here:
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