I follow Warren Buffett’s investment advice. I admire him. I avidly watch his interviews. It was in an interview that I heard him talk about Bitcoin. Warren Buffett is right about nearly everything, but he’s fundamentally wrong about Bitcoin.
Here’s four things he said and why he’s wrong:
1. “When you buy non-productive assets, all you’re counting on is whether the next person is going to pay you more because they’re even more excited about another next person coming along, but the asset itself is creating nothing.”
Buffet is right. Bitcoin is a non-productive asset. But it’s not supposed to be a productive asset. Bitcoin is a new form of money. Ultimately, as money, Bitcoin will be judged by how it holds its value, but for the moment speculation also plays an important role (as we will see later).
So Buffet infers we should be holding productive assets. He’s right. Our portfolio should be mostly productive assets such as stocks. But does that mean he doesn’t hold any money at all? As Business Insider reported in August, Buffett’s company Berkshire Hathaway holds $111 billion in cash.
Are Buffett’s words or actions wrong?
2. “It’s buying something because you expect the pool of people who want to buy it, because they want to sell it to somebody else, will grow.”
This statement reflects Buffett’s greatness as an investor. How? Buffett never bought a company because he thought others would buy it later. Instead, he analyses a company’s intrinsic value and holds the stock. As his returns have shown, Buffett’s strategy works.
But his inference is wrong. He infers that people are fools because they’re buying Bitcoins only because they believe they can sell it to other (foolish) people later. There’s a lot more going on than a greater fools theory.
Buffett succeeds because he focuses on intrinsic value. This is exactly what Bitcoin investors are doing, but with a cryptocurrency instead of companies. They buy Bitcoin because they see it as a better store of value than fiat currencies, and even gold. They believe because it is an intrinsically better form of money, the world will adopt it as their new form of money.
That means the trillions of dollars worth of fiat currencies today could, at least in part, be replaced by Bitcoin. Bitcoin is absolutely scarce, unlike gold which can be mined and fiat currency which can be printed. The number of Bitcoins is fixed. That means as demand increases, each Bitcoin will be worth more. That’s the speculation Bitcoin investors are making.
Is that a crazy theory?
Jamie Dimon is CEO of JP Morgan Chase and a favourite CEO of Warren Buffett. He’s also been one of Bitcoin’s biggest critics. In 2017 he called Bitcoin a fraud.
Yet, as CNBC reported, “J.P. Morgan Chase announced in October the launch of a blockchain-based system that will “significantly reduce” the number of parties needed to verify global payments, reducing transaction times “from weeks to hours.” Royal Bank of Canada and Australia and New Zealand Banking Group are the bank’s partners in the project, called the Interbank Information Network.”
That “blockchain-based system” that Jamie Dimon launched – that’s Bitcoin’s underlying technology.
His system is trying to replicate Bitcoin by using Bitcoin’s technology. Except unlike Bitcoin, his company will have complete control.
J.P. Morgan’s move shows institutional faith in the underlying technology of Bitcoin. This indicates the Bitcoins speculators were correct in recognising the Bitcoin blockchain as a better form of money.
So, while Jamie Dimon says Bitcoin is a bad investment, his company is creating a competing tool that uses the same technology.
Shall we trust the CEO of J.P. Morgan Chase’s words or actions?
3. “You can have anything you want to imagine if you just look at something and say ‘That’s magic’. You can do it with sharks teeth or sea shells or anything. You know, they did it with tulips in the 17th century in Amsterdam.”
What does Buffett think the U.S. dollar is? You know, the thing he has 111 billion of. Money is valuable because other people value it. The U.S. dollar has no intrinsic value. You can’t eat it. It won’t make your car run. It’s valuable only as a medium of exchange and store of value. You know, just like Bitcoin.
And sure, the tulip bubble burst, but shells were useful money for thousands of years. Of course, some forms of money are better than other forms. But as J.P. Morgan Chase indicates, money based on blockchain technology may be better than the U.S. dollar.
4. “If you had bought gold in 1942 and you said we might lose the war and we might have to run off to some other country, let’s put our assets in gold, you would have less than a penny for every dollar you got from owning stocks. Now if someone calls that a store of value I think they’re delusionary.”
Again, Buffet is right. Over long time periods gold has been a terrible investment in comparison to stocks. However, the expected return of Bitcoin is not comparable to the return of gold from 1942. There’s a huge difference.
The difference is that in 1942, gold had been traded, mined, and used for thousands of years. The demand was slowly linearly increasing because people already owned it as jewelry, for industrial use, and as money.
But imagine if gold was first discovered in 1942? Demand would have grown exponentially and chances are that gold would have outperformed stocks.
Bitcoin was invented in 2009, not thousands of years ago. If people, organisations, and institutions continue to adopt Bitcoin as a store of value, or major banks use it as a daily settlement tool, Bitcoin’s value will grow faster than the market index.
Most speculators, critics, and traders don’t understand Bitcoin very well. Admittedly, I’m one of those people. But it’s clear, so is Warren Buffett.