Why Buffet Doesn’t “Get” Bitcoin
Warren Buffett is the most famous name in stock investing, the second richest person in the world, and a leading expert in valuing companies and securities. He also is a big investor in banks, including Wells Fargo, Goldman Sachs, and Bank of America. So he has a lot of vested interest in the current monetary and financial system.
He recently said that bitcoin is in a bubble, which may well be true. He also said “You can’t value bitcoin because it’s not a value-producing asset”.
And yet, as of today, bitcoin has a market cap which is over $120 billion, substantially more than Buffet’s net worth. Bitcoin can be valued, but not like a security or a company, which is what Buffet does so well.
As we have written elsewhere, bitcoin is a currency, money, a cryptocurrency. Some will say it is a digital asset, like a digital gold. We say it is Money 3.0 (fiat is Money 2.0, gold and silver coins were Money 1.0).
Do these have value? Although none has intrinsic value and each costs a nominal amount to make the one on the right is worth quite a bit more than the one in the center, and the one on the left, more still.
Yes, money is designed as a store of value, a medium of exchange, a unit of account. Cryptocurrencies have the same design goals.
Bitcoin is a unit of account in a secure, distributed ledger. It has been a much better store of value than fiat currency in recent years.
In fact in 2014, Buffet said “It’s a mirage”. And yet, the value of a single bitcoin has increased 20 times since late October, 2014 to about $5800 today.
Money is valued by what you can exchange it for in the economy, by its utility. It is valued against other currencies. Bitcoin can be valued the same way, and thus by the vitality of the bitcoin economy.
Within the cryptocurrency world, bitcoin is the reference benchmark, just as the US dollar is globally. Bitcoin gets valued every single day, every minute of the day, against all major fiat currencies and against hundreds of cryptocurrencies. Like those currencies it has an economy and a turnover (or velocity) of the currency.
One thing we don’t normally think of with respect to cryptocurrencies is interest, or dividends. It is possible to lend out bitcoin for interest, as one can do with dollars, euros, or even gold. But bitcoin has effectively thrown off two special dividends this year, in the form of forks of the bitcoin blockchain. These are known as Bitcoin Cash (forked in August) and Bitcoin Gold (forked in October). Collectively, those two are worth close to $700, representing over 9% dividend rate to date during 2017, based on the current bitcoin price.
And for someone who bought at the beginning of the year, when bitcoin was under $1000, the dividend is around 70%. Not shabby, and a very reasonable reward for accepting the volatility.
Bitcoin is a technology for internet money, network money that is independent of any government, and it can be hard to fathom for the newcomer. Buffett has always said he does not understand technology. He was late getting into Apple, for example. He has not examined the technology and potential of bitcoin and other cryptocurrencies sufficiently to have an informed opinion.
Bitcoin’s future value? It all depends on how the economy around bitcoin develops, but it will be quite an adventure. And bitcoin to bagels it will increase in value over the next several years.
Stephen Perrenod has lived and worked in Asia, the US, and Europe and possesses business experience across all major geographies in the Asia-Pacific region. He specializes in corporate strategy for market expansion, and cryptocurrency/blockchain on a deep foundation of high performance computing (HPC), cloud computing and big data. He is a prolific blogger and author of a book on cosmology.