Bitcoin has become increasingly popular among many investors in recent years. Indeed, its price has risen from $460 to $58,000 in the past five years largely as a result of improving investor sentiment that it can eventually replace physical currencies.
However, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio) will not be buying Bitcoin anytime soon. The famous critic of the virtual currency has repeatedly and ardently vocalized his opposition to it. At the recent Daily Journal (DJCO, Financial) annual meeting, he stated:
"I don't think Bitcoin is going to end up as the medium of exchange for the world. It's too volatile to serve well as a medium of exchange. It's really kind of an artificial substitute for gold, and since I never buy any gold, I never buy any Bitcoin. I recommend that other people follow my practice."
Bitcoin's limitations
In my view, Munger makes a couple of excellent points. He highlights the high volatility that has been inherent in Bitcoin's performance. For example, over the past month its price has ranged from a low of $47,000 to a high of $64,000. Similar levels of volatility have been present throughout its history, with it also being difficult to assess why its price has moved in a specific direction over a short space of time.
High volatility is in large part due to its lack of intrinsic value. Bitcoin is only ever worth what investors are willing to pay for it. Unlike a company, it does not have assets, cash flows or profitability that can provide a yardstick through which investors place a value on it. As a result, the virtual currency's price is dictated the extent to which people are willing to adopt it as a medium of exchange.
In addition, Munger highlights Bitcoin's status as an "artificial substitute" for gold. Many investors seem to be bullish about the virtual currency because they feel it has a relatively low correlation with the economy's performance, which could make it a defensive asset comparable to gold. However, both assets do not produce anything and are reliant on investors being willing to pay increasingly more for them in future. This contrasts with gaining value through growth in assets or profits, as in the case of stocks.
A blight on society
Munger also discussed Bitcoin at the 2021 Berkshire Hathaway annual meeting. He kept his comments brief but highlighted his opinion that Bitcoin should never replace governmnet-issued currencies, calling it a "blight on society." He stated:
"I hate the Bitcoin success… I think I should say, modestly, that I think the whole development is disgusting and contrary to the interests of civilization."
Personally, I am inclined to agree with Munger's comments. I think Bitcoin is a bubble that may not end well for its holders. Its price is determined solely by investor sentiment, rather than underlying value, which suggests there could be a sharp reversal in its price should investor views ultimately change.
In my view, a diversified portfolio of stocks held for the long term is a far more logical approach to investing capital versus taking a gamble on the virtual currency.
Disclosure: The author has no position in any stocks mentioned.
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