When Warren Buffett talks about money, people tend to listen. The 87-year-old’s credentials are in good order. The “Oracle of Omaha” has served as the chairman and largest shareholder of multinational holding company Berkshire Hathaway since 1970. He is worth nearly $83 billion, making him the third-richest human being on the planet as of February 2018. He is rarely outside of the top five. He was briefly the world’s richest man in 2008, overtaking and subsequently being overtaken by Microsoft founder Bill Gates the following year.
Yet Buffett has drawn substantial criticism for his pooh-poohing of Bitcoin. In no uncertain terms, the billionaire wizard investor has called Bitcoin a scam and prophesied its inglorious end. Only time will tell if the Oracle’s predictions are correct, or – as some critics claim – he’s just a bit sour that he didn’t see Bitcoin coming.
Early Life and Career
Warren Buffett hails from Omaha, Nebraska, and Omaha still hosts the headquarters of Berkshire Hathaway. The son of a Congressman, Buffett began his business career early. Reportedly, one of his first business ventures involved buying six-packs of soda from his grandfather’s sundry shop and selling the bottles for five cents apiece – netting him a nickel of profit for every six-pack purchased.
He bought his first security at 11 years old – three shares of CitiesService Preferred for $38 per share. He sold the stocks at $40 per share and then was crestfallen to discover they were soon going for $200 per share. This allegedly was the formative event of his core investment strategy, summed up in his now-famous quote: “The stock market is a device for transferring money from the impatient to the patient.”
Buffett was educated at several universities before ending up at Columbia University and meeting post-1929 Crash investor Ben Graham. Graham would become Buffett’s mentor in the years ahead, although their investment philosophies stood in stark contrast to each other. A survivor of the Great Depression, Graham focused on companies that carried little to no risk. Buffett sought to completely understand a company’s inner working, making his risk assessment based on the company’s potential. Eventually, Buffett liquidated the sizable portfolio he had amassed, keeping only a few token holdings – among them the seeds of Berkshire Hathaway.
A young Warren Buffet, Image from YouTube
Today, Berkshire Hathaway outright owns a slew of household company names, among them: Dairy Queen, Fruit of the Loom, GEICO, BNSF Railway, and Pampered Chef. It also owns significant portions of the Kraft Heinz Company, American Express, Wells Fargo, Coca-Cola, Apple, and Bank of America.
Buffett has long been a White House staple, most recently meeting with President Barack Obama for economic guidance and backing Hillary Clinton’s failed bid for the office.
Buffett on Bitcoin
Buffett has never been a big supporter of Bitcoin. In early 2018, he reiterated his distaste for cryptocurrency investors in several high-profile interviews with major news outlets.
To Buffett, cryptocurrencies represent a gamble more than a sound investment. He’s even gone so far as to call Bitcoin “probably rat poison squared” in a Berkshire Hathaway shareholder meeting.
Warren Buffett, Talk Bitcoin on CNBC
Furthermore, he said, it’s likely that cryptocurrency will end with a bang as opposed to a fizzle.
“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” Buffett told CNBC. “If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it, but I would never short a dime’s worth.”
These predictions have drawn a lot of ire from the cryptocurrency community. Two main counterpoints have been raised to Buffett’s take on the situation. The first is that Buffett is simply a financial guru from a different era, and his understanding of Bitcoin is severely limited. The second is that Buffett understands cryptocurrencies perfectly well. In fact, he understands them so well that he realizes they are a threat to his holdings in a variety of traditional banking platforms.
Old Money Versus New
Venture capitalist Fred Wilson and Balaji Srinivasan, the chief technology officer of popular U.S. fiat-to-crypto exchange Coinbase, addressed Buffett’s comments at the Consensus 2018 event in New York City.
“Calling it ‘rat poison,’ to me, suggests that they haven’t taken the time to really understand what’s going on here,” Wilson said in an on-stage interview with the Wall Street Journal. “If all you think of it as is some new asset class and some new thing that you can trade, then I think you’ll come to that conclusion. But if you really understand that this is a fundamental innovation in foundational technology for the internet that provides a bunch of new functionality that didn’t exist before this, then what I see it as is like the LAMP stack (web development toolkit) or something. This is an entirely new stack that we’re going to get to build new applications on top of, and the tokens are just the fuel that lights up that stack.”
Srinivasan added that Buffett might be one of cryptocurrency’s most high-profile opponents, but his view is far from monolithic. The leaders of IMF and Goldman Sachs are both bullish on Bitcoin in the long term, and Goldman Sachs has taken steps toward opening its own cryptocurrency exchange.
Other market observers have pointed toward additional comments made by Buffett as evidence that he just doesn’t “get” cryptocurrencies enough to have a credible investment opinion toward them.
“We don’t own any, we’re not short any, we’ll never have a position in them,” Buffett has said. “I get into enough trouble with the 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 about?”
An Emerging Threat
At least some market watchers believe that Buffett’s comments are mainly for show. The man has shown remarkable prescience of a storied investment career, and although he’s been reluctant to embrace new technologies in the past, he’s always managed to adapt to changing market conditions, they argue.
It’s far more likely, these observers say, that Buffett understands crypto well enough to know that it poses a challenge to traditional financial institutions, which supports Berkshire Hathaway via its holdings in Bank of America, Wells Fargo, American Express, and others.
Banks vs Cryptocurrency, Image from HowMuch
Ethereum’s total market capitalization is similar in size to JP Morgan Stanley, while Bitcoin’s market cap is about equal to Bank of China. Much of the fervor against cryptocurrency is fueled the very real fear that cryptocurrencies will eat into banks’ market share and eliminate their very profitable middleman position – a goal outright stated in Bitcoin creator Satoshi Nakamoto’s Bitcoin paper.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party,” Nakamoto wrote. “Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.”
Buffett: Relevant or Rusty?
It likely won’t be clear in Buffett’s lifetime whether cryptocurrency is a long-term boom or bust. Some crypto roadmaps stretch out for decades, and Buffett has been in business since well before WWII. His words and influence in the traditional banking sector, however, will likely linger far longer than the businessman himself. It remains to be seen whether his “rat poison squared” will end up validating his legacy or dating it.
References
- https://www.thebalance.com/warren-buffett-biography-356436
- http://www.businessinsider.com/lessons-warren-buffett-learned-from-benjamin-graham-2015-5
- http://www.businessinsider.com/facts-about-warren-buffett-2016-12
- https://www.cnbc.com/2018/05/05/warren-buffett-says-bitcoin-is-probably-rat-poison-squared.html
- https://bitcoinmagazine.com/articles/fred-wilson-explains-why-warren-buffett-doesnt-get-bitcoin/
- https://themerkle.com/are-gates-buffet-and-munger-all-threatened-by-bitcoin/
- https://howmuch.net/articles/banks-vs-cryptocurrencies
- https://bitcoin.org/en/bitcoin-paper
- https://www.nasdaq.com/quotes/institutional-portfolio/berkshire-hathaway-inc-54239
