Thinking Out Loud: Is Warren Buffet Right About Bitcoins?

Since appearing twice on CNBC in March, Warren Buffet has become a ‘marked man’ of bitcoin backers, taking the villain

Since appearing twice on CNBC in March, Warren Buffet has become a ‘marked man’ of bitcoin backers, taking the villain role of the industry.  His most notable detractor has been Marc Andreessen, who on multiple occasions has questioned Buffet’s understanding of the blockchain and new technology in general.  (It can be argued that as an investor in Coinbase and other related startups, Andreessen has a vested interest in promoting bitcoins.  However, as an investor, he has also made the due diligence of the value of bitcoins to provide a sound argument which can’t be ignored regardless of his personal benefits.)

I believe it is worth reviewing just what is Buffet’s opinion on bitcoins.  Among his interviews with CNBC, it was his second that led to the most headlined after calling bitcoins a mirage.  His appearance on CNBC was part of an announcement about backing a billion dollar reward for coming up with a perfect NCAA Tournament Bracket, as such bitcoin wasn’t the main discussion.  However, the commentators took the opportunity (let’s face it, it was a ratings play) to question Buffet of his opinion about bitcoins, which he then went onto provide his one-sided answer without much scrutiny on the subject.

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Buffet began by retorting “Stay away from it. It’s a mirage basically”.  He then added that ” It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? You can transmit money by money orders.”

Buffet continued by stating that “I hope bitcoin becomes a better way of doing it, but you can replicate it a bunch of different ways and it will be. The idea that it has some huge intrinsic value is just a joke in my view.” He then concluded again that “its transmitting money and there dollars on both ends.”

Negative Feedback

As one could imagine, the immediate feedback from pro-bitcoin commenters and articles wasbeen negative, with the majority of posts focusing on Buffet’s aversion to technology.  Buffet himself has often stated that he “doesn’t invest in things he doesn’t understand”.

On CNBC itself, Vance Crowe, founder of Articulate Ventures published a response shortly after the ‘mirage’ interview where he pointed to the fact that you could pay for things with bitcoins meant it wasn’t a mirage, as well as stating that bitcoin can’t be compared to money orders as Buffet said, since it is money.

Buffet Understands Money

There is little doubt that Buffet isn’t a maven on technology.  He doesn’t claim to be one, and stocks of companies in emerging technologies aren’t an area he invests in.  This aversion is due to his investment philosophy of buying cash flow generating companies and not picking winners in emerging trends.  However, one thing that Buffet does understand is money and risks associated with it.

As an operator of insurance companies, Buffet is faced with the challenge of reinvesting payments his firms collect at a higher rate than that they payout on policy claims.  He therefore targets firms with predictable cash flow businesses that can be held for long periods of time.  In addition, he is known to place derivative bets in situations where he believes odd are very much on his side based on historical trends.  Through his Berkshire Hathaway holding company, Buffet even pulled off a negative coupon bond sale, where in essence he was paid to borrow money.  Therefore, regardless of his views on technology, he understands money, and along with that knowledge comes an understanding of how funds are transferred.

Based on that understanding, Buffet formulated a response that covered both the value of bitcoins as a currency as well as its underlying technology. Among points he covered, were several important aspects about bitcoins

1) He stated it is “very effective way of transmitting money”

2) Bitcoin can be replicated

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3) It is being exchanged to fiat on both sides of the transfer.  Meaning in his eyes he was seeing being used for fiat valued purchases, but utilizing an exchange back and forth with bitcoins to take advantage of its anonymity and global reach

In a twist, Buffet did provide positive comments on the technology of bitcoins as a form of efficiently transmitting money.  This revealed Buffet does have an understanding of bitcoins as a form of payment.  However, he didn’t believe that bitcoins the currency held any intrinsic, or perhaps better stated “sustained value”.  (This was a view he has mentioned in the past by stating that bitcoins aren’t a currency since they aren’t a source for storing value)

In regards for the lack of intrinsic value, Buffet’s premise is based on two things.  First, that bitcoins can be easily replicated.  Secondly, in his his view, bitcoins are being used as a medium to send dollars from one person to another, with both sides remaining in a fiat based value system. (An example of this is where bitcoins are purchased by users to facilitate remittance payments, but neither side is interested in holding bitcoins for a sustained period of time )

While each of the two positions on its own can be debated, Buffet’s point was that since it is being used as a form of transferring money, bitcoins are only a medium, similar to that of checks and money orders; thereby having a minimal intrinsic value.  By calling bitcoins “a mirage”, it can be argued that Buffet was focusing on this intrinsic value.  Even for legal purchases such as at Overstock.com or buying online gift certificates to be used at hundreds of retailers, the use of bitcoins are as an alternative payment form, with the vast majority of sellers converting them into fiat.

What is the Intrinsic Value?

To Buffet, intrinsic value is nearly zero if not zero.  To Andreessen and others, the value is based on the whole worth of the blockchain.

Determining intrinsic value of bitcoins is one of those calculations where seemingly every computation has a different answer.  When creating bitcoins, Satoshi Nakamoto, in his essay, Bitcoin: A Peer-to-Peer Electronic Cash System, steered away from dictating a view on the value of bitcoins. According to the essay, as well as subsequent posts about it early writings of forums, the value would be based on cryptographic proof instead of trust.  But evaluating that value can be considered entirely subjective.  However, while not addressed in the essay, follow on comments of Nakamoto’s have represented that he expected value to increase as more users adopted the currency.

Buffet on the other hand, doesn’t appear to subscribe to the idea that a decentralized digital currency has any value versus a centralized one.  According to his view, the intrinsic value of is based on it being a facilitator of fiat valued transactions, which he believes it could do a good job of, but is replaceable.  As far as he is concerned, the bottom line is costs and usability.  Therefore, in his mind there is no difference whether a payment transfer is based on a decentralized ledger or not, but which model is most efficient.

Technology vs Payment Type

Taking a step back, I believe much of the debate that surrounds bitcoins are what it really is?

When moderating the panel on Digital Currencies at the IFX Expo last week, one of the questions I asked was  “Would bitcoins be considered a success if they disappeared in ten years, but led to an industry wide disruption of the payment sector, causing across the board declines in all forms of transfers?”

The answer is based on one’s opinion of the role of bitcoins.  As a pure payment type, than yes, bitcoins would be a success if they disrupted the industry and caused fees to fall.  However, if your view is that in answering the question of how to solve double spending on a decentralized ledger, bitcoins have created an entirely new form of what money should be, than the question of fees is less important and comes down to how well are bitcoins digitalizing the entire financial system.

So, is Warren Buffet right about bitcoins? It depends on how you answer what is more important; bitcoins the payment product, or bitcoins the decentralized blockchain and new form of digital technology.

‘Thinking Out Loud’ is a new bi-weekly column where the writers of DC Magnates present their opinions on the digital currency industry curated from covering the market

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