I wouldn’t bother commenting on crypto currencies because I don’t understand the topic. But this is just too good to pass up. Buffet and Munger are not fans of the stuff. CNBC reported back on Jan 10, 2018 that Warren Buffett thinks cryptocurrencies will end badly.
Buffet considers it a method of transmitting money and has no intrinsic value. He has said that bitcoin is “probably rat poison squared” and noxious.
This is from the Berkshire Hathaway AGM last weekend in Omaha, Nebraska:
Munger to Buffet: “I like cryptocurrencies a lot less than you do. To me, it’s just dementia. It’s like somebody else is trading turds and you decide you can’t be left out.”
Buffet: “To the extent we are being broadcast around the world, I hope that your comment doesn’t translate.”
(Hat tip: Karthik.)
Mind you, I am not endorsing their view. They probably don’t understand cryptocurrencies, and I definitely don’t. It’s just that I found Munger’s analogy funny.
Atanu Dey : Life is a Random Draw 
Quoting Mr. Taleb “Don’t tell me your opinion, show me your portfolio”.
The Oracle of Omaha has been pretty bad at predicting anything related to tech and has admitted many times that he was completely wrong about Google, Amazon and many more. Hopefully he is wrong about cryptos as well.
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I think that the Oracle of Omaha would himself admit that he’s been wrong before and it is quite likely that he’s wrong about Bitcoin and the like.
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Cryptocurrencies are gaining ground, partly because of the way each country is racing to devalue their own currency, and like crypto currencies, even fiat money has no intrinsic value, just the word of the government in power and we all know how fragile and mismanaged Governments can be.
I am no expert in Crypto currencies either , but Warren buffet has himself admitted to not knowing a great deal about tech companies, so these comments have to be taken with a pinch of salt.
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While Buffet and Munger don’t know much about technology trends, I feel it is worth listening to them carefully given that their expertise centers around money supply, banking and currency.
Buffet’s exact words were: “It is a mirage basically. It is a method of transmitting money. The idea that it has a huge intrinsic value is a joke in my view”.
I don’t think he’s trashing the innovative the concept of a blockchain, that could have great applications that are disruptive to the status quo in multiple financial applications. But is blockchain exclusive to bitcoin? If blockchains are widely used as a method of distributed accounting and validation, does bitcoin directly benefit and increase in value?
How does one value a bitcoin, when the peer to peer money exchange, with no actual middlemen, does not entail anyone taking a cut? I believe that the entities that perform the “work” effectively generate some valid currency as a reward to keep the system flowing with the right micro incentive. But there is no single party to which all the expansion of bitcoins accrues, right? To the extent that I understand it, because it remains a novel currency at the moment, the valuations and hype are around the value of the bitcoin itself. But in the long run that specific vehicle has no intrinsic value. Does the US dollar have an intrinsic value — it doesn’t, right? It is the promise of who is backing it that gives it its strength. What bitcoins provide is ease, speed, security and perhaps most importantly, the “backing” of the the collective whole of bitcoin holders. Is that last part the most important part in its valuation – and am I overlooking that?
With digital banking so omnipresent today, let us say, the US declares that it will not print any notes more than $5 in a few months and that people should handle everything electronically since there is almost universal penetration of digital banking in the US. Most people already use debit or credit cards or checks, and rarely see more than $1000. I haven’t handled or even seen more than $1000 in cash in my interactions in decades. Similar to India’s demonetization effort, this hypothetical US digital push outlined may paralyze the economy in the short-term and even wipe out some vendors because of their dynamics and clientele, but other businesses could benefit. There will be pain until people get used to the constraints and adapt their behavior. But buy and large, this will be a temporal disturbance that will be overcome, I think. In this fictitious scenario, has the increased digitization added to the strength of the US dollar? I feel what Buffet is saying is similar — in the long term, the mode of currency and its interchange, especially with no central authority skimming of it in a not-easily replaceable way, has limited attractiveness as an investment.
If a financial institution is built to accept and transact in bitcoins, offer loans with an interest in bitcoins, and build up infrastructure to be tuned to bitcoin exchange, I think that company, as a first mover, could have an attractive valuation. Like a pioneering bank. But that doesn’t mean the bitcoin in itself is an attractive long-term investment.
There is a good chance that my reasoning here betrays my cluelessness about the role and mechanics of currency in an economy, and fully expect to be schooled by savvy economists 🙂
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Vrooh, digital currency is not different from paper currency in its function. If you print too much currency, it leads to devaluation of the currency. Even if no one used paper dollars, and if the US stopped minting paper money, the money supply can easily be manipulated digitally. The same holds for bitcoins or anything else for that matter.
Digital currency is only the next step in the evolution of the money (the means for exchange in a market.)
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“The same holds for bitcoins or anything else for that matter.”
This is not true for bitcoin. The total number of minable bitcoins is fixed in the system. 21 million.
The protocol makes it impossible to change through mathematical functions. Any change will require the agreement of 51% of people on the network effectively creating a “hard fork”.
There are some very good resources to learn about Bitcoin. I would recommend that you start by the book “Internet of Money”.
Bitcoin is not just a digital money. Most of the money in the world is already digital. Bitcoin is a P2P bank owned by everyone. It’s value determined by the value given to it by the people in the network.
This is a subtle but huge difference.
You can also read this paper by Nick Szabo:
http://unenumerated.blogspot.in/search?updated-max=2017-02-23T23:48:00-08:00&max-results=11&start=1&by-date=false
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Right, Atanu, I agree entirely with what you said in your comment. So that’s my point (and Buffet’s too?): crypto currency is changing the ‘mode’ of exchange of the currency/money, digitizing it entirely. So how do you value that new currency type / entities backing it, in the long run?
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Vrooh: “So how do you value that new currency type / entities backing it, in the long run?”
If the “you” referred to me, my answer is that if I knew how to properly value the next currency, I would be making millions, not hanging out writing a blog. If the “you” was the generic you and the question was how is the new currency’s value determined, then the answer is that the market does so. The myriad interactions between market participants who each have their subjective valuations determine what the new currency trades at. The price emerges and is not determined by any strict subset of interacting agents.
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Thanks, nice response 🙂
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