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John Engle
John Engle
Articles (604) 

Charlie Munger: Avoid Bitcoin Like Poison

Warren Buffett's right-hand man has nothing good to say about cryptocurrencies

December 30, 2020 | About:

For value investors such as Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), speculation is anathema. Thus, it is hardly surprising that both legendary investors continue to look upon Bitcoin and other cryptocurrencies with extreme skepticism.

Yet, while Buffett has been a vocal critic of bitcoin for years, his comments sound downright ebullient when compared to those of Munger. Indeed, Munger has established himself as one of Bitcoin's most vocal opponents.

An asset with no value

Munger's antipathy toward bitcoin is well documented. In the past couple years alone, he has variously described Bitcoin as "rat poison" and "noxious." At the annual meeting of Berkshire Hathaway shareholders (BRK.A)(BRK.B) in 2018, Munger was particularly scathing: "To me, it's just dementia. It's like somebody else is trading turds and you decide you can't be left out."

According to Munger, Bitcoin's value is purely the product of speculation. As an asset with no fundamental value and no prospect of becoming an earning asset, speculators must simply hope that the price of Bitcoin goes up in response to still more speculation. As Munger explained to CNBC in May 2018, this is not a recipe for sustainable, or stable, asset value: "Bitcoin reminds me of Oscar Wilde's definition of fox hunting: 'The pursuit of the uneatable by the unspeakable.'"

An asset that produces tangible value can be priced based on a number of factors. An asset that produces no tangible value and is little more than a speculative vehicle cannot be priced based on anything but subjective market psychology.

Currency viability in doubt

Munger's dislike of Bitcoin extends beyond its nature as a purely speculative asset. He has also taken issue with the notion that Bitcoin can serve as a viable currency alternative at all. Munger has echoed the likes of Bridgewater's Ray Dalio (Trades, Portfolio), who has questioned bitcoin's viability as a currency due to its inherent volatility and governments' absolute monopoly on the definition of what constitutes legal tender within their borders.

To Munger, Bitcoin is nothing more than "worthless artificial gold" because it is practically certain that major governments would never allow the social movement it implies to become reality. Indeed, he drew a rather unfavorable comparison between the digital currency and the yellow metal in late 2017:

"You know it is one thing to think gold has some marvelous store of value because man has no way of inventing more gold or getting it very easily, so it has the advantage of rarity. Believe me, man is capable of somehow creating more Bitcoin... They tell you there are rules and they can't do it. Don't believe them. When there is enough incentive, bad things will happen."

Even if Bitcoin is able to overcome the hurdles necessary to be treated like a serious currency and store of value in its own right, other problems remain. As Munger explained in May 2018, bitcoin's success "would facilitate a lot of illicit activity" due to the anonymity and lack of regulation. Munger doubled down on this point during an interview earlier this year published on Live Bitcoin News, arguing that widespread adoption of Bitcoin could open the door to bad financial actors.

My verdict

The speculative frenzy that has driven Bitcoin ever higher is built on a lot of assumptions about the asset's future utility as a currency and store of value, but those assumptions are still a long way from being proven to be plausible.

Until that happens, Bitcoin's value will be subject to the whims of market psychology. Consequently, I recommend following Charlie Munger (Trades, Portfolio)'s sage advice for the time being.

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.

Rating: 5.0/5 (2 votes)

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Comments

stephenbaker
Stephenbaker - 3 months ago    Report SPAM

Is bitcoin the best we can do to replace fiat currencies? If not, Munger is right.

John Engle
John Engle - 3 months ago    Report SPAM

Bitcoin is pretty clearly not the best we can do to replace fiat currencies. So Munger is right. QED.

dukkipat
Dukkipat premium member - 3 months ago

Answer is simple, go back to the currency when he started his career: GOLD

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