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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

Warren Buffett Takes on Bitcoin

Bitcoin is in a bubble, according to one of the most seasoned investors of our time

October 27, 2017 | About:

Cryptocurrencies, especially bitcoin, have been on an exponential rise for quite some time now. The astronomical rise begs the question: Are cryptocurrencies, specifically bitcoin, in a bubble? Well, Warren Buffett thinks so.

Addressing students during a Q&A session recently, Buffett criticized Wall Street for accommodating big price movements in cryptocurrencies. Buffett was blunt in his comments on bitcoin; he thinks the cryptocurrency isnt a value-producing asset, and it cant be valued for that reason. He didnt go so far as to predict the reversal in the market.

Proponents of the cryptocurrency arent silent though. Peter Thiel, the co-founder of Paypal (NASDAQ:PYPL), believes that bitcoin is underestimated. Its like a reserve form of money. Its like gold, and its just a store of value. You dont actually need to use it to make payment, said Thiel in an interview. Thiel further argues that its secure, and it cant be diluted by government. But all of his bullishness is based on the presumption of bitcoin becoming the cyber-equivalent of gold.

It seems like the bitcoin mania is going to play out in one of three ways: adoption as a currency, adoption as a store of value or adoption as a collectible.

Adoption as a currency is highly unlikely

There are several issues that have be addressed for bitcoin to become a mainstream currency.

First, the volatility in bitcoins price is hindering its widespread adoption for payments. Bitcoin is just accepted at three out of 500 top retailers, according to Internet Retailer.

Second, transaction fees are quite high, which makes bitcoin unfavorable for small everyday transactions.

The key problem with bitcoins acceptance as currency is regulation. Fiat currencies are highly regulated. Transactions are monitored closely as governments want to maintain control in economic policies, reduce criminal activity and related money laundering.

If bitcoin is regulated, the appeal will fade as it wont be different than any other digital mode of transaction. Other benefits of bitcoin including speed of transaction can be replicated by financial institutions through using blockchain technology.

All in all, if markets are valuing bitcoin as a currency, then Buffett is right to call bitcoin a bubble.

What about Peter Thiels argument that bitcoin will be cyber equivalent of gold? This question brings up the second scenario where bitcoin can be widely accepted as an alternative to gold.

Adoption as a store of value is possible, not probable

This scenario is more likely to pan out than being a currency as bitcoin has all the features of being a store of value. According to Aswath Damodaran, a professor of finance at NYU's Stern School of Business, cryptocurrencies are becoming an alternative to gold for people who dont trust conventional currencies. He further argues that gold doesnt have as much of a utilitarian function as other commodities; its rather a store of value. Hence, gold cant be valued; it can only be priced. Similarly, a price tag can be put on bitcoin, but it cant be valued.

He agrees with Buffett in a sense that bitcoin isnt a value-generating asset. He differs from Buffett as he thinks that bitcoin isnt in a bubble. Following Damodarans argument, bitcoin is only a minuscule of golds value. Gold in circulation is roughly valued at $7.5 trillion as compared to a market cap of $98.4 billion for bitcoin.

Damodaran ignores the fact that gold is unique. Cryptocurrencies can be created using the blockchain. The threat of a new emerging currency will always be there for bitcoin, which isnt the case for gold. Thats one of the reasons why its difficult to compare bitcoin to gold. Moreover, gold has a long history of being used as a store of value. It would not be easy for any cryptocurrency to take that status away from gold.

Takeaways

Buffett is usually right. It wouldnt be wise to bet against him. Hes right to say that bitcoin cant be valued because theres no value-generating aspect of bitcoin. He didnt comment on bitcoin being a store of value. Its implied, though, as he commented on bitcoin being in a bubble.

The future of bitcoin is uncertain as a store of value amid uncertainty around its ability to be a dominating cryptocurrency in the long run. Threat of emerging currencies is always there. Unlike gold, bitcoin isnt unique; it has competitors.

In short, we should listen to what Buffett is saying.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

Visit Soid Ahmad's Website


Rating: 4.6/5 (5 votes)

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Comments

vgm
Vgm - 2 years ago    Report SPAM

Thanks for sharing your thoughts.

I would also factor in the strong negative comments made recently by Buffett's favorite banker - Jamie Dimon.

Will be interesting to see how it plays out over time.

Soid Ahmad
Soid Ahmad - 2 years ago    Report SPAM

Yes. Dimon called Bitcoin an outright Fraud. But, I think it too early to call. Central Banks and governments will push for their own currencies, and if that doesn't work out. They may call to ban Bitcoin. The currecny do has potential. But, goverments don't like to lose control. That is the most challanging aspect for Bitcoin going forward. Let's see how it pans out.

minifesto
Minifesto - 2 years ago    Report SPAM

I have had 15 people phoning me pushing Bitcoin in the last 3 months. Beware being TLF the last fool.

atiwary
Atiwary - 2 years ago    Report SPAM

Well. I appears all you gentlemen didn't buy any bitcoin. I on the other hand did buy bitcoin less than a month ago and it has turned out to be one of the best investments of my life. I've experienced more than 100% growth in the last 30 days! I bought during the recent swoon in the value of bitcoin when there was news that China was going to regulate bitcoin. However, I'm now thinking I should sell but whenever I check every few days I see price has increased. All the best in your investments.

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