Bitcoin (BTC)–Warren Buffett, one of the world’s most famous investors and nicknamed the ‘Oracle of Omaha’ for his apparent foresight in the stock market, has been characteristically bearish on the outlook of cryptocurrency. Buffett, parroting other entrenched Wall Street figures, has gone on record in the past supporting a looming cryptocurrency bubble, telling CNBC in January that “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”
However, in the same interview, Buffett announced his naivety on the industry of cryptocurrency and the crypto markets, stating, “I get into 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.” While Buffett has left enough room in his stance to not look foolish in the event that Bitcoin becomes a world-power, he still holds an overall negative tone on the growth of cryptocurrency and its place in the hierarchy of financial vehicles.
Last week, Buffett made headlines again in relation to cryptocurrency, telling Yahoo Finance in an interview that Bitcoin is not really “investing”. As opposed to following a traditional route of investment in stocks or real estate, Buffett cites the overwhelming volatility of cryptocurrency as a barrier to holding the same type of label. Instead, he lumps crypto in with various forms of gambling, with price speculation alone driving the market and investment practices as opposed to more analytical price valuation,
“If you buy something like a farm, an apartment house, or interest in a business […] you can do that on a private basis […] and it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like Bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”
Buffett is echoing the argument made by so many crypto detractors, including an article written by former PayPal CEO Bill Harris when he labeled Bitcoin the “greatest scam in history.” While Buffett and Harris both possess a deep understanding in the financial market, Buffett more in stocks, Harris through fintech products, neither professes to have more than a transitory comprehension of cryptocurrency.
From the outside, yes, cryptocurrency has the appearance of a pyramid scheme and one built upon escalator pricing. The only reason Bitcoin purchased today will be worth more tomorrow is simply if someone is willing to pay for the higher valuation. However, nearly all investment vehicles function in a similar manner. Stocks may be built on the back of companies, which post profits and price-to-earning ratios that analyst can use to project valuation, but they are still beholden to the volatility and emotional subjectivity of the market. Hardly a month goes by without a company, through the stock market, angel investing or venture capital, being grossly overvalued and bordering on total collapse.
In 2014, Theranos, a “revolutionary” blood testing company, had raised 400 million USD in private capital and was pegged at a valuation of 9 billion USD by highly compensated experts. Within a year, through a combination of faulty products and over-promising, the company had sunk to a valuation of 800 million–a number considered by many to be generous given how high profile the failure was. That’s a decrease of 91% in valuation, all in the span of one year. Bitcoin, since its last all time high in December, has experienced a decline of 53% in value following the bear market.
Investing is volatile. Perhaps not to the degree experienced in cryptocurrency, but Wall Street is nonetheless beholden to overvaluation and irrational pricing. The difference is that while Wall Street cherry-picks their traders from the brightest minds among MIT and Harvard, crypto trading is made up of a network of Main Street joe’s and characteristically younger investors–some highly talented and intelligent–but a global, anti-corporate enterprise nonetheless. It gives the appearance of an immature, amateur market that most big name investors like Buffett see as child’s play.
Buffett and Harris also make the critical error of confounding the general volatility of cryptocurrency, or certain coins, with that of Bitcoin. A 50% loss since the last all-time high is still an astounding amount of capital to disappear from the market. But that could also be viewed as an inevitable correction from an investment vehicle that leapt nearly 300% in value, and several hundred billion in market cap, in the span of two months. Since the beginning of last year, BTC is still up 800% in valuation,
Bitcoin Adoption and Coinciding Price Growth
Harris attempted to tackle the argument that scarcity drives Bitcoin pricing with an analogy to making autographs: he can sign far fewer than 21 million autographs in a lifetime, but nobody will pay much for them.
While Harris is clearly making a tongue-in-cheek reference to BTC, he misses the underlying value of the technology of Bitcoin–a mistake many BTC detractors continue to make. Money is only valuable because a collection of people ascribe value to it. Everyone on the planet could decide, starting tomorrow, that US dollars are worth 1/100th of what they are today. Likewise, a large collection of people have ascribed a certain value to Bitcoin and created the market conditions for the number to grow concurrently with adoption. If you want to participate in the functionality that Bitcoin offers, you must be willing to pay for it. As more people come to see that value, or potential use in terms of development and mercantile implementation, the price will continue to climb. If Bitcoin fades to obscurity, then the price will go with it.
The genuine features of Bitcoin go beyond digital transfer and cryptography. Bitcoin offers individuals, for the first time in history, an agreed upon means of currency that transcends government interference. No one can introduce inflation (hard forks are an entirely different occurrence). No individual, or minority group of individuals, can takeover the decision making for Bitcoin’s development. No government can limit or restrict its sale and transfer (aside from outright banning internet connections). BTC can be carried, in near-infinite quantity, across borders and through transactions across the globe. Those are the features that most excite the community behind Bitcoin. While most of the public outside the market is hung up on stories of overnight millionaires and the massive amount of profit that has been made through crypto in the last year, investors who appreciate and understand Bitcoin are looking at a technology that will have a place in the future. Not just blockchain, but Bitcoin.
Buffett may not be able to see past the volatility of cryptocurrency to label Bitcoin anything other than speculative gambling, but those who have ingrained themselves in the industry know that price is only another distraction–the real value is in what Bitcoin offers the world.