Why Buffett and Munger are Dead Wrong About Bitcoin (and Gold!)
Featured article brought to you by Dr. Richard Smith, CEO and Founder, TradeSmith
Buffett and Munger are wrong about Bitcoin for the same reason they’re wrong about gold. The annual Berkshire Hathaway meeting, affectionately known as “Woodstock for Capitalists,” recently took place in Omaha, Nebraska.
The legendary value investors Warren Buffett and Charlie Munger, as they do every year, took questions from the crowd and around the world. They expressed opinions on all manner of topics including Apple, Buffett’s new favorite stock holding, and cryptocurrency, which both of them hate.
Their opinion of crypto was especially harsh. Bitcoin “is probably rat poison squared,” Buffett reportedly said. Trading in cryptocurrencies is “just dementia,” Munger said. Another comment from Munger was actually too disgusting to print.
Rat poison and dementia. Really? It seems that Warren Buffett and Charlie Munger really, really don’t like cryptocurrencies. To understand why, it helps to understand another asset Buffett and Munger have despised since time immemorial: Gold.
In describing his negative opinion on cryptoassets while answering a question, Buffett started off by mentioning gold, which was helpful in demonstrating his thinking:
“Nonproductive assets remain that way. Gold at the time of Christ to now has a compound rate of a couple tenths of a percent. These assets won’t deliver anything other than supposed scarcity, but so what, what does it produce itself? All this is counting on someone else later on trying to buy a nonproductive asset because they can sell it for a higher price… in the end you make money on productive assets.”
Buffett and Munger hate gold (they have trash-talked gold for decades) because gold is not a cash-flow producing asset. It has no yield and pays no dividend. There is no stream of income.
Because it produces no cash flows, and has no stream of income, value investors don’t know how to analyze gold. And that is mostly why Buffett, and value investors in general, tend to dislike gold (or in some cases hate it). They see gold as “ not a real investment,” because it doesn’t produce anything.
In Buffett’s mind, Bitcoin is like gold in its failure to produce. It has no yield. It has no stream of cash flows. Therefore it can’t be a real investment, just like gold isn’t a real investment (according to Buffett). Buffett and Munger are wrong about gold (possibly on purpose). And the reason they are wrong about gold explains why they are wrong about Bitcoin.
The simple way to understand gold is this: Gold is a form of insurance. It is a “store of value” that has stood the test of time. The whole point of gold is that it’s an asset you can trust when everything else is in trouble. Gold is sometimes referred to as a “stateless currency,” meaning it is the only legitimate form of globally accepted currency not issued by a sovereign state.
Gold is also known as “the only currency not subject to the whims of a printing press.” When does this designation matter most? When the printing presses are running like mad.
Do you know what else qualifies as a “stateless currency” not subject to the whims of a printing press? Bitcoin. The role of Bitcoin, as a store of value in times of turmoil, is comparable to the role of gold. When Buffett mentioned gold, he said it has a compound rate of “a couple tenths of a percent” from the time of Christ until today. And he meant that as an insult.
But here is the amusing counter-argument: What paper currency can you think of that has survived since the time of Christ? Heck, what empire has survived that long? There isn’t one. They all collapsed. Yet gold is still here. You buy gold as a store of value, a kind of hedge against the monetary system or even the whole global order going bad.
This happens from time to time. It could certainly happen again. This is why gold is best understood as a form of insurance. This is why the brilliant investor Ray Dalio (the founder of the largest hedge fund in the world) has said everybody should own gold. Insurance is a big part of Berkshire Hathaway’s business model. Insurance plays an important and valuable role today’s world. Nobody says insurance contracts are worthless just because they don’t have a yield. Why don’t Buffett and Munger understand this?
The truth is that Buffett and Munger probably understand gold’s function quite well. They just don’t like the idea of gold being a hedge against the financial system, because they carry huge stakes in the financial system and don’t want anyone to lose faith in it. Think of all that Wells Fargo and Bank of America stock, and all of the other deep connections to the financial system that Berkshire maintains.
Buffett and Munger probably hate gold because they don’t want to imagine a chaotic world where gold is soaring in price by thousands of dollars per ounce – even though that could easily happen. This is just a guess, but it seems Bitcoin makes Buffett and Munger nervous for the same reason that gold makes them nervous. Gold is a hedge against chaos. A world in which gold is soaring is one in which inflation is running rampant or the financial system is falling apart.
We experienced that world in the late 1970s, and the big pendulum swing of long-term cycles means it could be coming around again. And Bitcoin is a “store of value” just like gold, potentially ready to play the same role. It is stateless and borderless. It is fixed in its ultimate quantity. And various observers have called Bitcoin a “proxy for chaos,” a store of value to put faith in when the system is trembling or collapsing.
Some have argued that Bitcoin could actually replace gold. They believe that Bitcoin is superior to gold in every way, so much so that Bitcoin could take over gold’s “store of value” duties entirely. We have said in the past this won’t happen. Bitcoin will never truly replace gold. That’s because gold has a track record that is thousands of years long, and a global storage and distribution network, and countless generations who have put faith in it, and governments sitting on large stores of it.
Wealthy European families with hundreds of billions worth of gold bars locked away deep in Swiss vaults are not suddenly going to trade those bars for Bitcoin. Central banks around the world, which collectively store trillions worth of foreign reserves in gold, are not going to trade their gold reserves for Bitcoin. So Bitcoin, as a “digital store of value,” is not going to replace gold. But it doesn’t have to. As a digital store of value, all Bitcoin has to do is achieve a modest portion of gold’s market share to do quite well.
It’s possible that millennials, the new generation that is now of investing age, will choose Bitcoin as a digital store of value over gold. It’s also possible that investors in various countries, seeking to move a portion of assets out of the monetary local system, will choose Bitcoin for some of those assets.
And so, while Bitcoin will not replace gold, it is wholly possible for Bitcoin to ultimately take, say, ten percent of gold’s market share, as a digital store of value for mobile investors and the new generation. If Bitcoin took just ten percent of gold’s market share, the price could rise to $47,000. Here’s how.
All the gold ever mined, still existing in the world today, has a current value around $8 trillion. Bitcoin’s recent price was about $9,300 at a market cap of roughly $159 billion. If Bitcoin’s market cap rose to 10% of gold’s, that would be about $800 billion. That would be an increase of roughly 5X, putting the price just under $47,000.
This is not a prediction mind you. It is just a plausible example. The numbers can move around, and Bitcoin taking ten percent of gold’s market share is just a hypothetical (and reasonable) scenario. It’s also possible that, against a backdrop of rampant inflation or a new financial crisis, gold goes up in value by an extreme amount – in which case Bitcoin could go up an extreme amount too, making the $47,000 estimate look tame.