Warren Buffett, arguably the most successful investor in the world and ninth richest person as of January 2022, does not like Bitcoin. His partner Charlie Munger is very outspoken and has said that Bitcoin is ‘disgusting and bad for civilisation’. He says that ‘bitcoin is created out of thin air’ and is used as a ‘payment for criminals’.
Warren Buffett is known for his value investing and does not see Bitcoin as an investment as it has no return or yield, but is he missing the point or is he the wisest investor out there and pointing out yet another speculative bubble (of which he has avoided many in his lifetime)?
It’s hard to go against the success of Warren Buffett, but could he be missing the importance of cryptocurrencies?
Bitcoin (or blockchain) is a disruptive technology that will / is changing the face of finance and banking. It is not meant to be an investment. When the internet was created, it was not meant to be an investment, it was a disruptive technology that changed our world.
Warren Buffett is very good at spotting and avoiding bubbles. He invests in ‘old school’ investments and would not invest in a company or product that he does not understand. He famously didn’t invest in the ‘dot.com‘ tech bubble of the 2000s, which was followed by a crash, as he said he didn’t understand the valuations. He correctly identified the speculative behaviour, but maybe missed the importance of what was being created with the internet. Maybe now he is also seeing a bubble in the cryptocurrency market, but again maybe missing the importance of what is being created with cryptocurrencies?
The documentary ‘Banking on Bitcoin’ by Christopher Cannucciari, reflects that cryptocurrency was a formative idea between several cypher punks, that didn’t take off until the financial banking crisis in 2008. When the banking crisis occurred the cypher punks could see the need for a currency that was not controlled by a central authority, and fully independent of third parties. What they wanted to create was a way to store your wealth that could not be lost by a banking crisis. In emerging countries, a banking crisis could wipe out your life’s work and wealth. They could see the vulnerabilities of the Western banking system and wanted to created a safer storage of wealth outside of the banking system.
They did not want to create a ‘product out of thin air’ that could be used for speculation, the aim was for a replacement digital currency that could not be destroyed or lost. The blockchain technology allowed a currency to be created that is limited in its production as it has to be ‘mined’ and can not be printed. It can not be hacked as it is decentralised and is therefore safer to hold.
The irony is that the cypher punks that created cryptocurrencies were looking to avoid a ‘fiat currency that could be created from thin air’. Bitcoin is limited in volume to the amount that can be mined, the total supply of Bitcoin being limited to just 21 million coins, unlike fiat money which has no limit in supply.
The vulnerabilities of the banking system, that were exposed in the 2008 financial crash, have not gone away. Rising inflation may force central bankers to increase interest rates to defend the value of currencies. This is something that has been avoided at all costs because it could trigger defaults on debts and threaten the banking system. Central bankers have not been able to raise interest rates from emergency low levels for decades.
Could cryptocurrency be a way out of an ‘indebted and vulnerable financial system’ for a younger generation?
Whilst Warren Buffett may have correctly identified speculation in the cryptocurrency price, he may have missed the bigger picture. Cryptocurrency is not an investment, this is a new paradigm to create a safer store of value in a digital global world. No wonder the younger generations are getting excited and lapping up the idea of a ‘fresh start’, without the debts of previous generations to burden them. I don’t think they see cryptocurrencies as bad for civilisation.
Rebel Economics 