Saturday, November 18, 2017
Bitcoin

Why Buffett Sees Bitcoin Bubble

by John Wasik

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If something is “virtual,” does it really exist? This question has haunted us since the beginning of our journey as Homo sapiens.

When it comes to Bitcoin and other cryptocurrencies, this is an important question. You can buy and sell stocks, bonds, paper currencies and commodities like corn and wheat. They exist in the real world. You can physically deliver them, although they mostly are represented in electronic form.

Warren Buffett. (Photo by Jamie McCarthy/Getty Images)

Which brings us to Warren Buffett, one of the greatest investors ever, who recently noted: “You can’t value bitcoin because it’s not a value-producing asset…it’s a real bubble in that sort of thing.”

For those of you devoted to decoding Buffett’s every pronouncement, his meaning is clear: Cryptocurrencies are not tangible investments. They don’t generate earnings or pay dividends. How do you really value them if they have no intrinsic or “book” value? And people who buy bitcoin are simply betting that the price will go up.

While I’ve always argued that there’s a place for cryptos in modern finance — governments shouldn’t have a monopoly on mediums of exchange — we need a refined understanding of whether computer code is a suitable replacement for hard currencies.

The one powerful factor about currencies — and even gold — is that there’s a finite amount of it. Well, that’s mostly true, until governments start printing money, which begets inflation in many cases.

There’s also said to be a finite amount of Bitcoin, although we still don’t know much about how it’s created or its mysterious creator. That’s troubling.

Yet Buffet has a real concern. If you don’t know what goes into something, meaning a lack of transparency, it can be snake oil. Here’s Buffett’s concern:

“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”

Although anyone can speculate on conventional investments like stocks and precious metals, it’s important to know what Bitcoin is not. Despite what Peter Thiel, one of the founders of PayPal says, it’s not gold.

“I’m skeptical of most of them (cryptocurrencies), I do think people are a little bit … underestimating bitcoin especially because … it’s like a reserve form of money, it’s like gold, and it’s just a store of value. You don’t need to use it to make payments,” Thiel said.

Here’s where we need to make a distinction: You can put all of the tangible gold mined on the planet in a large swimming pool. You can never do that with a cryptocurrency. That begs for a better definition of how to value a virtual denomination of wealth.

Anyone is free to speculate on anything from land to soccer matches. It’s human nature. Yet don’t confuse a cryptocurrency with something you can hold in your hand — like gold.

Remember that most of the gold on earth is in the ocean — dissolved in quadrillions of gallons of water that you can’t even drink.

John F. Wasik is the author of “Lightning Strikes,” “Keynes’s Way to Wealth“and 15 other books on innovation, money and life.

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