Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio) and even Bill Gates (Trades, Portfolio) had some harsh words for bitcoin and cryptocurrencies in the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting and subsequently on CNBC.
Below you will find two clips of Buffett and the trio discussing the digital currency. I’m one of the few people in the value investing world who is bullish on Bitcoin and some select cryptocurrencies.
I understand their apprehension and agree that very generallly speaking most people should stay away. However, without some counterpoints, their take does not seem a fair represenation of the bitcoin investment case. Munger dislikes it most vehemently but there were few substantial arguments among his lines.
Warren Buffett (Trades, Portfolio): "When you buy non-productive assets all you are counting on is that the next person coming along will pay you more for it. One interesting example is gold."
This view is essentially correct. But it is not exclusive to bitcoin or cryptocurrencies. You can argue the same thing for gold or most precious metals as well as many sorts of collectibles. What attracts me to bitcoin is that it’s an emerging currency or emerging asset with a fixed supply. The bitcoin blockchain is widely acknowledged to be the most secure, decentralized and easy to access ledger. If you want to register a transaction on that extremely valuable blockchain you need to transact at least one millionth of a bitcoin in order for it to register.
There will be organic demand for pieces of bitcoin in order to keep a register onto this blockchain independently from its use as a store of value or currency. Interestingly, you can connect lots of things to this blockchain. That is why this is rightfully called a new asset class. It actually has properties other asset classes don’t have.
If you hear the argument you could simply create another blockchain and register your transactions on it, that’s not correct. That blockchain is not safe. It is the proof-of-work system, with bitcoin transactions requiring the highest dedication of a type of computing power that is not useful for anything else. That makes the network ultra safe. A new network doesn’t have that property among other properties.
Warren Buffett (Trades, Portfolio): "If you and I get some cryptocurrencies they are just going to sit there."
This is true for Bitcoin and quite a few other cryptocurrencies. For good measure, consider 99% of them are scams or will turn out terrible investments. Let me get that straight. But the literal statement above can be disproven.
Take a cryptocurrency like Augur. Augur is a prediction market platform. What is that? It’s a place where anyone can put up a question and others can stake units on the outcome. For example, you could create a market around the question:
Will Golden State become NBA champion in 2018?
Yes
No
This platform works such that in retrospect the people who gave the correct answer receive most of the units staked by the people who put up the wrong prediction. The person who created the question also receives a small cut as well as the people who report the outcome.
People who report the outcome, what?
What’s so cool about this project is that there are no employees who retrospectively decide what is the correct prediction. People holding Augur can vote which is the correct outcome. The algorithm works such that if you have a habit of reporting the truth you can make money by reporting, if you hold Augur. Augur is essentially a productive asset.
This type of token is often referred to as a utility token. It is not just something you hold speculating whether it will go up, but it ties into some kind of revenue stream.
Warren Buffett (Trades, Portfolio): "You can do it with shark teeth or sea shells or tulips. People sold their house in Amsterdam to buy tulips. The tulip bulb bubble is a famous historical example of, in retrospect irrational, speculation."
There is some debate among historians about how much that is exaggerated, but let’s leave that argument aside for now.
Here is a key difference between oil, gold, shark teeth, sea shells, tulip bulbs and bitcoin on the other side: As prices go up, supply will increase. You can grow tulips for example.
There will be no more than 21 million bitcoin underlying the bitcoin blockchain. If anything, there will be fewer over time as they get lost or are destroyed sometimes.
If you bought gold in 1942, you would have less than a penny for every dollar you got from stocks.
You will not see me arguing to load up on bitcoin once it is an established asset class. By that time it will be much less interesting. Imagine, however, you had the possibility of buying a U.S. dollar in 1861 when paper dollars were introduced. But imagine this U.S. dollar was both infinitely divisible and the government did not have the ability to print another one. As the U.S. dollar became the reserve currency of the world it would have increased in value 1000 times.
An analogous scenario can unfold with bitcoin. It is certainly not a high probability event, but the asymmetric payoff makes it an interesting proposition.
Bill Gates (Trades, Portfolio): "Bitcoin and ICOs I agree completely are one of the crazier speculative things. Pure greater fool type of investment. I would short it if there was an easy way to do it."
The speculative frenzy is a tough one to tackle. I don’t like it, and it tends to be something to shy away from. Maybe that’s the case here.
Let’s look at 1999, for example. Microsoft and Amazon stock reached enormous heights before cratering later, but investors would have come out great over time. You can argue most of the cryptos will crash and burn as did most of the crap in '99, and I’d agree to that. If you shy away from the entire space on the basis of not being able to separate the wheat from the chaff, that’s completely fine. I think that’s a solid way to think about investment in the space and for not investing there. What I take exemption with is that because there is speculation and fraud, it isn’t worth looking. This is an asset class where disparity of returns will retrospectively be one of the greatest we’ve ever seen and if anywhere that’s were the active investor wants to look for value.
Warren Buffett (Trades, Portfolio): "If someone criticizes your investment you should like it. If they really like what they own they wouldn’t mind me criticizing it."
Yes, I’m taking the other side of Buffett on this one. That doesn’t mean I don’t have the utmost respect for him. What Buffett has done and is doing for the development of the field of asset allocation is hard to overstate. He’s an inspiration from his craft to his ethics.
I’m saying this because Buffett is taking a lot of flack from the crypto crowd for his positions. He deserves more respect even if he could have researched this better.
There are probably investors in bitcoin who love that he is talking it down. This happens all the time when I comment negatively on stocks or the market. If you dislike something, you are going to get flack for it. It’s a bit worse with battleground stocks like Valeant, Herbalife or Tesla. It’s really not unique to bitcoin. It’s a good lesson by Buffett, but that there is a lot of speculation by retail investors is not really news. Neither does it disprove the investment case.
Disclosure: Author is long bitcoin and Augur, among a few select other cryptocurrencies.
