Does Bitcoin’s recent flash crash mean Warren Buffett is right to hate crypto?
Ethan RotbergSat, September 11, 2021,
After a bully first quarter of 2021 that led to an all-time peak of $63,000 per unit in mid-April, the world’s leading digital currency now hovers around $45,000, thanks in large part to a Tuesday flash crash of roughly 15%.
Holdout investors who only a couple of weeks ago may have thought they’d missed an opportunity of a lifetime are now sighing with relief; meanwhile, those who bought in at the peak are trying not to think about their losses.
And what about Warren Buffett? What would the world’s most famous investor say to those who might be thinking of firing up their investment apps and buying Bitcoin at a bargain price.
It’s “probably rat poison squared,” Buffett once said.
‘Contrary to the interests of civilization’
While Buffett chose not to comment on cryptocurrency during his company Berkshire Hathaway’s annual shareholders meeting earlier this year, Berkshire vice-chairman Charlie Munger pulled no punches on the subject.
“I don’t welcome a currency that’s so useful to kidnappers and extortionists,” Munger said during the meeting’s much-watched Q&A session. “The whole damn development is disgusting and contrary to the interests of civilization.”
Not to be outdone, Buffett has made his share of extremely cutting remarks about Bitcoin and cryptocurrency over the years: “I don’t have any Bitcoin. I don’t own any cryptocurrency, I never will,” he told CNBC in 2020.
Here are three reasons Buffett won’t go near it.
1. It has ‘no unique value at all’
The billionaire investor doesn’t like Bitcoin because he considers it an unproductive asset.
Buffett has a well-known preference for stocks of corporations whose value — and cash flow — come from producing things. But cryptocurrencies don’t have real value, Buffett said in a CNBC interview in 2020.
“They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem.”
Though Bitcoin is intended to provide real value as a payment system, that use is still pretty limited. As Buffett sees it, Bitcoin’s value comes from the optimism that someone else will be willing to pay more for it in the future than you’re paying today.
2. He doesn’t think crypto counts as money
As a tradeable asset, Bitcoin boomed. But does it meet the three criteria of money? According to the most common definition, money is supposed to be a means of exchange, a store of value, and a unit of account.
But Buffett calls it a “mirage.”
“It does not meet the test of a currency,” the billionaire said on CNBC in 2014. “It is not a durable means of exchange, it’s not a store of value.”
He adds that it’s a very effective way of anonymously transmitting money. But: “a check is a way of transmitting money too,” he said. “Are checks worth a whole lot of money just because they can transmit money?”
3. He doesn’t understand it
Buffett became one of the most successful investors in history by sticking with stocks he understands.
“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?”
But people like to gamble, he told CNBC after a 2018 Berkshire Hathaway annual meeting, which is another problem with non-productive assets.
“If you don’t understand it, you get much more excited than if you understand it. You can have anything you want to imagine if you just look at something and say, ‘that’s magic.’”
How does Buffett pick winning stocks?
The billionaire investor follows the value investing strategy — which focuses on buying undervalued stocks of strong companies and holding them for a long time.
Berkshire Hathaway looks for companies with a good profit margin and those that provide products or services that can’t easily be substituted. Some of the largest holdings in Berkshire’s portfolio include financial behemoth Bank of America, credit card leader American Express, and beverage giant Coca-Cola.
As Warren Buffett once said in a letter to his shareholders, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
But Buffett’s distaste for crypto stocks doesn’t mean you shouldn’t buy Bitcoin. Even the billionaire has come around on sectors he previously spoke out against.
He notoriously avoided tech stocks, even at the height of the dotcom bubble, and now his company’s largest holding is Apple.
Create an income stream instead
Bitcoin has made a lot of people rich along the way. But that doesn’t mean you’ve missed the boat on investing — just listen to Buffett’s words of wisdom and focus on assets that produce cold, hard cash.
For instance, some popular investing services make it possible to lock in a steady rental income stream by investing in premium real estate properties — from commercial developments in LA to residential buildings in NYC.