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When you write about Bitcoin on Medium, you receive negative feedback in the comments.
Regardless of what side of the fence you sit on.
It shows the polarising effect you can have on people when you lean to one side of a discussion.
The digital asset space is an emerging market that will eventually become mundane in a few years. These speculative conversations on whether they have any value will become meaningless.
Some will probably go to zero.
It doesn’t mean you don’t need to hear the view of the most successful investor who openly criticises the world’s most popular digital asset, Bitcoin.
While most 11-year-old boys played baseball and read comic books, Buffett bought stocks.
By 16, his net worth was the equivalent of $53,000, and now he’s one of the wealthiest men in the world with an estimated $89 Billion.
It would help if you listened to his thoughts on Bitcoin, whatever side of the fence you sit on. You might even be sitting right in the middle.
Warren Buffett believes buying Bitcoin is like a “greater fool theory” investment. In other words, you’re just counting on someone else to pay more for it in the future rather than the asset having any real value.
He also contrasts Investing in businesses vs Bitcoin. He says with businesses, you’re looking at the earnings and potential of the company, but with Bitcoin, you’re buying a non-productive asset, which doesn’t produce anything.
In simpler words, he’s saying you’re taking a massive gamble, and the value of Bitcoin is not guaranteed.
Warren Buffett — Source
“It’s [Bitcoin] a delusion.
It’s a kind of a pure ‘greater fool theory type of investment.
You look at the asset itself and what it produces for you.
When we buy a business, we look at what it earns and decide how we feel about it regarding what we pay.
But when you buy non-productive assets, all you’re counting on is whether the next person is going to pay you more because they’re even more excited about another next person coming along.
But the asset itself is creating nothing.”
Buffett believes if you invest with the hope of making a quick profit, which he sees as the mindset of people buying Bitcoin, it can be a dangerous trap.
He says it’s best to look at an asset’s long-term potential, and he uses a farm’s productivity as an example of something that produces value.
Warren Buffett — Source
“If people think they’re going to make money the next day, and worse yet, if they think somebody else they know is going to make money, and they aren’t going to make money, it just draws people in.
“When you buy a farm, you look at the crop yearly and its prices and decide whether it was a good investment.
You look to the asset itself and what it produces for you.”
He also states that investing in non-productive assets like cryptocurrencies is similar to buying a tulip bulb in the 17th century or a stamp collection, and it’s all based on the hope that someone else will pay more for it in the future.
Warren Buffett —Source
“you can buy a wonderful stamp collection, and you can sell it for more money in the end, but it’s dependent on somebody else wanting to buy, hoping they will sell it for more money, and so on and in the end.
You make your money out of productive assets.
I think that anytime you buy a non-productive asset, you are counting on somebody else later to buy a non-productive asset because they think they can sell it to somebody for more money, and it’s been tried with tulips.
It’s been tried with various things and has a bad ending.”
Warren Buffett has a clear opinion on non-productive assets like Bitcoin. He believes it’s a bubble and these investments don’t give you long-term value.
He advises you against buying something with the hope that its price will go up the next day, which never ends well because the costs of these assets rely on more people buying them than selling them, and it can feed on itself for a while, but in the end, it will come to a bad ending.
Warren Buffett — Source
“It’s a bubble; generally, non-productive assets remain in it.
And also, nothing is being produced in the way of value from the asset you’re buying.
“When you buy something because you’re hoping tomorrow morning you’re going to wake up and the price will be higher, you know you need more people coming into it than they’re leaving, and you can get that, and it will feed on itself for a while.
Sometimes for a long while, and sometimes it’ll do extraordinary numbers, but in the end, they come to bad endings, and cryptocurrencies will come to bad endings.”
Raoul Pal
Raoul Pal is a well-known economist, hedge fund manager, and financial commentator.
I write about him a lot because he has this knack for explaining complex concepts and making them easy to understand.
If you listen to his videos, you’ll hear him speak a lot about the potential of Bitcoin and its underlying technology, Blockchain.
One of the concepts that Pal often references in his analysis of Bitcoin is Metcalfe’s Law, which says that the value of a network is proportional to the number of connected users.
In other words, the more people adopt and use a network, the more valuable it becomes.
Pal says this is particularly relevant for Bitcoin, as its value is tied to its network effects and adoption. And not the productivity value Buffett compares it to like a business or a farm.
Pal believes that as more people adopt Bitcoin and use it for transactions, the value of the network will increase, and in turn, the value of Bitcoin will increase.
He says the adoption of Bitcoin is still in its early stages and has a lot of room for growth, making it a potentially valuable investment opportunity.
Raoul Pal — Source
“We now know that Metcalfe’s Law is the key valuation model for digital assets, but it’s a hard formula to apply, and I’m a bit of an idiot, so I wanted to find an approximation that helps understand network value.
After a lot of work, trial and error, this is the answer I found”
Tweet 2.
“THE VALUE OF A DIGITAL ASSET NETWORK IS DRIVEN BY DAILY TRANSACTION VOLUMES (IN DOLLARS OR UNITS OF VALUE) X NUMBER OF ACTIVE USERS”
Tweet 3.
When you apply this formula to digital asset networks, you get a really good fit.
Here is Bitcoin #Bitcoin
Tweet 4.
“Bitcoin has pristine collateral, security, and its store of value brings large numbers of users transferring large sums of value hence why it is the most valuable network.”
Final Thoughts.
Warren Buffett is a top-notch investor.
The best.
But his perspective is outdated regarding Bitcoin and other cryptocurrencies.
A big concept for me that made me a real believer in Bitcoin was Metcalf’s law. This idea is that the value is in the network of people who adopt the technology, not necessarily the tech itself.
You can’t deny even when we experience a bear market, the upward adoption trend of Bitcoin continues.
The people using the network become the most prominent cheerleaders. It’s like how social media apps become hard to dethrone. People want to avoid the mental arithmetic of learning the new app.
And it explains Bitcoin tribalism to a tee.
Buffet’s view of Bitcoin as a non-productive asset with no real value is a non-starter for me.
Bitcoin has a unique network effect and the potential for substantial further adoption. Metcalfe’s Law states that the value of a network grows as more people join it, which is entirely applicable to Bitcoin, which is altogether different to stocks.
Bitcoin has had a rocky past and comes with its risks, but you should keep in mind that it has the potential to be a disruptive technology.
Warren Buffett is a master at investing in traditional stocks, but Bitcoin and other cryptocurrencies operate in a completely different sphere.
Buffet may not live to see this all play out, but you can take his famous business partner’s advice.
Charlie Monger:
“If you disagree with somebody, you want to be able to state their case better than they can, and at that point, you’ve earned the right to disagree with them.”
This article is for informational purposes only; it should not be considered financial, tax or legal advice. You can consult a financial professional before making any significant financial decisions.
This article is for informational purposes only; it should not be considered financial, tax or legal advice. You can consult a financial professional before making any significant financial decisions.