Taking the risk on crypto: What Warren Buffett says about bitcoin

Warren Buffett

A detailed look at Warren Buffett’s opinion on cryptocurrency and counterarguments against his ideas

Earlier this month, Tesla’s CEO Elon Musk posted a meme on Twitter about businessman and philanthropist Warren Buffet. The meme had a quote attached to it that read, “find as many coins as you can and fast.” This was attributed as Buffet’s best financial advice. But the tweet has since been deleted.

Ironically enough, this is far from what Buffet actually believes. “Cryptocurrencies basically have no value and they don’t produce anything,” says Warren Buffet. “I don’t have any cryptocurrency and I never will,” he added.

Buffet is considered one of the most successful investors of the 20th century. Known as the “Oracle of Omaha,” Buffet has a personal fortune of US$100.4 billion, per the Bloomberg Billionaire Index.

Buffet has molded his investment philosophy around the concept of value investing. Value investing involves the purchase of stocks that are being traded for less than what they are worth.  Buffet today owns Berkshire Hathaway holding company. The company has averaged a 19% annual growth since 1965.

Buffet has been highly critical of cryptocurrency. In his company’s annual meeting in 2019, Buffet compared cryptocurrency tokens to the buttons on his jacket. He said that he could tear off a button and value it at US$1000 and try to sell it at a higher price, but “ the button has one use and it’s a very limited use.”

Buffet has compared cryptocurrency to rat poison. According to Buffet, cryptocurrency has been used to move around money illegally. Berkshire Hathaway’s Vice Chairman, Charles Munger has also been equally vocal in his critique.

Agreeing with what Buffet previously said, Munger believes that cryptocurrency is useful for kidnappers and extortionists. He even went on to say that, “the whole damn development is disgusting and contrary to the interests of civilization.”

Responding to Buffet’s critique

Not a durable means of exchange or store of value

Buffet critiques cryptocurrency for not being a durable means of exchange or a store of value. His critique stems from the fact that the value of a cryptocurrency changes over time. The reason why this critique does not hold true is because most cryptocurrencies are deflationary.

An example of how a deflationary currency works is Bitcoin. When Bitcoin was first introduced in 2009, it had no official price. It hit the US$1 mark in February 2011 and its price has been volatile ever since. The volatility of prices is a by product of Bitcoin’s limited supply which is capped at 21 million. The limited supply ensures that over time the value of each Bitcoin rises over time.

Moreover, Bitcoin has been gaining relevance over time. One key event that brought Bitcoin to the limelight recently was El Salvador accepting it as legal tender. The country’s adoption of the cryptocurrency led to a 6% jump in its prices.

The growth of decentralized financing (DeFi) platforms is a testament to how effective cryptocurrency is as a means of exchange. As of April 2021, DeFi has become a US$100 billion sector.  DeFi platforms allow users to exchange one cryptocurrency for another. They can be used to obtain traditional banking services, such as loans, as well.

As more and more businesses continue to accept Bitcoin, it has begun gaining usability. For instance, now people can purchase from Starbucks, Microsoft’s Xbox store and e-commerce stores, like Rakuten, using Bitcoin and other cryptocurrencies. This implies that, over time, the problems Buffet mentions could be eliminated.

Supports criminal activity

The illegal uses of cryptocurrency mentioned by both Buffet and Munger can be attributed to the fact that crypto transactions are pseudo-anonymous. The word ‘pseudo’ becomes very important here. While a user cannot be identified by name when making a transaction, their wallet can be. Each user’s wallet is assigned a unique address. These can be linked back to the user by conducting chain analysis. For instance, US officials were able to recover a large portion of the US$4.4 million ransom that a Russian hacker extorted from Colonial Pipeline to reopen its critical fuel route.

This case shows how unwarranted the fear of flourishing illegal activity due to cryptocurrency is. Moreover, as countries build regulatory frameworks to prevent terror financing and tax fraud using crypto, the concern will only diminish.

An example of this is Australia, where cryptocurrency is regulated under the anti-money laundering and counter-terrorism financing act of 2006. This act requires digital financing platforms to identify their customers and report any suspicious transaction activity.

Difficult to understand

Perhaps one of the biggest reasons why Buffet has been so critical of cryptocurrency is because he does not understand it. “I get in enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don’t know anything about?” he says.

With cryptocurrency still being an evolving concept, erring on the side of caution is a sensible move. Today the price of a single Bitcoin is US$30,812. In spite of what investment experts like Buffet might say, the rising value of Bitcoin is a testament to people’s faith in cryptocurrency.

As more and more traditional financial institutions such as Goldman Sachs, JP Morgan, Morgan Stanley and Visa begin to adopt crypto, clarity on its diverse uses and its financial viability will increase.

Header image courtesy of Unsplash

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