Last week at the Berkshire’s annual investors meeting, Warren Buffet and Charlie Munger were asked about bitcoin. They both repeated their opinions they have expressed in the past about bitcoin and why they wouldn’t invest in it. But this time they gave a little bit more of an explanation regarding the reasons why they think bitcoin is not a good investment. Charlie Munger went as far as saying bitcoin is evil. Buffet and Munger are legendary investors who made fortunes by smart investing strategies, and they also made fortunes for those who believed in them and invested in Berkshire Hathaway. There is no doubt they are great investors. But not all great investors understood all investment instruments, not all great investors foresaw all great investment opportunities. In fact, they missed out on some of the best investment opportunities of the 21st century, especially in technology sector. Could they be wrong about bitcoin? I believe so.
When great investors like Buffett and Munger talk about markets and specific investment instruments, people tend to listen. Because both have great accomplishments in markets and lifelong successful experiences to back up their claims. I too would listen. It is important to listen to these views, especially when they are counter to our own beliefs about something. By analyzing all possible shortcoming of certain investment instruments, weighting risks, and rewards, giving a decent amount thought, we may either make our original convictions stronger or realize the flaws in our initial assessments. It is not news that Buffet and Munger don’t like bitcoin. They have expressed these thoughts before, and it doesn’t look like their position on this topic will change any time soon.
Warren Buffett said: “ If you told me you own all of the bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything.” He said this while comparing bitcoin to an investments in farmlands and apartments in the US. He continues to say that bitcoin doesn’t produce anything tangible, that it doesn’t do anything. As he explains he is waving a $20 dollar bill in his hand, stating that USD is the real money and US government wouldn’t replace this real money to something like bitcoin. He tried to make his point by saying that anybody could create their own money and gave an example of Berkshire having its own money. But his conclusion was any of these alternatives wouldn’t be money because there is no need for United States government to abandon USD.
Charlie Munger had even more negative views about bitcoin, and he believes bitcoin is evil. This time he explained why he believes bitcoin is evil. He said, ”In my life, I try to avoid things that are stupid and evil and make me look bad in comparison to somebody else – and bitcoin does all three.” Then he continues with his explanation, ”In the first place, it’s stupid because it’s still likely to go to zero. It’s evil because it undermines the Federal Reserve System and national currency system. And third, it makes us look foolish compared to the Communist leader in China. He was smart enough to ban bitcoin in China.”
I find Buffett’s explanation to be contradictory of his general investment strategies and something he recommended to many over the years. One of his suggestions to all investors has been, considering whether the certain company or asset will still be around in the next 10 years or even more. I have asked this question about bitcoin and hive several times and the answer always ends up being yes. I don’t see any reason why bitcoin wouldn’t exist in ten years, regardless its value in USD or purchasing power. Can anybody give a single reason that would make bitcoin disappear within next 10 or 20 years? I haven’t seen one yet. Its decentralized nature makes it even more impossible for it to not exist anymore. Now let me tell you why I believe Buffett and Munger are wrong.
Buffet made a false comparison. He said he would write a check for 25 billion of dollars for 1% stake in the US farmlands without thinking much about it, because they produce something. He said he would write a check for 25 billion dollars for 1% stake in all apartments in the country, because they provide rent revenue. He used 25 billion as an example, and what he meant was would pay any reasonable sum of money and wouldn’t hesitate to invest in these. However, when he talked about bitcoin, he said he wouldn’t pay $25 dollars for all the bitcoins. He didn’t say 1% stake in bitcoin, but he said all. That’s a false comparison. If there was a way for him to own all the bitcoin, there would be no point of bitcoin anymore. Now if he said 1% or even less that could be a genuine and realistic argument. But nobody would believe this would be an honest statement.
Let’s say for some altruistic reason Michael Saylor offers all his bitcoins to Buffett for $25 dollars. No sane person would decline such offer. No investor would decline such offer. This makes Buffett’s argument dishonest and unreasonable. I do understand the point he is trying to make though. He thinks bitcoin cannot be money because it is digital, and it is not controlled by the government. Let’s explore this more. Digital vs physical argument is very weak. Most of the fiat currency supplies exist in digital form. They are just numbers in some centralized Federal Reserve database. Only small percentage of the fiat currencies exist in paper form in the circulation. Even if all fiat currencies were in paper form, digital vs physical argument would still be weak. Because we have witnessed so many transformations from physical to digital without loss of value, but rather creating more efficient and effective ways of doing various things.
For example, for centuries people communicated sending letters to each other. With the advancement of computer technologies and networking system we have created better communication systems like emails, messaging, etc. Most people no longer write letters, but rather use emails or messaging apps to communicate. Has the value of messages or communications been lost? Same communication we used to do on paper, we do it in a digital form now. I doubt anybody would argue this has made things worse. It that was the case we would still be writing letters. Now since these communications are not physical, can we say they don’t exist?
Governments for some reason, let’s take the US keeps full control of US Mail. US Mail is a government entity. While there are other private shipping companies like FedEx, UPS that may provide some competition, US government remains to have control over physical mails. This is not the case with emails. Email services people use are often belong to private companies. It is true governments can make these companies to share some of these emails when needed, although may require court orders. But for the most part email systems do not belong to governments. They wouldn’t be able to control them even if they wanted to. That’s how technology works. Technology moves so much faster than any government can keep up. And it is a good thing. Governments don’t ignore the benefits of these technologies. They use them themselves to make things work more efficiently.
Similarly, we can look at esports. Traditional sports and sports entertainment have been athletes engaging in physical activities and games. Esports have been growing as well, and it seems like will continue to grow. That doesn’t mean traditional sports will disappear. They can both coexist just fine. Technology doesn’t have to replace the traditional ways of doing things, bur rather to offer new ways and enrich the human experiences. I believe there any digital vs physical argument would be weak, because of the facts that digital has been part of our daily lives and routines already. We may not understand the purpose and solutions at first. As time goes by and more use cases are demonstrated, things become more obvious.
Can technology improve money? That’s they case bitcoin is trying to make and many seem to agree. As the understanding of this technology continues and adoption grows, we can see the benefits of bitcoin as money and the solutions it offers. Just like anything in life, things have value if there are those who are willing to exchange that value to obtain these things or services. Be it physical or digital. I don’t see a need to list all the benefits bitcoin offers. Just the fact some us humans are willing to accept it as money should be good enough to consider it at least as an alternative option.
I doubt Buffett’s opinions on bitcoin are due to lack of knowledge and understanding of this technology. I would assume someone in his position would have teams who do proper research all the new things happening in the markets and provide all the necessary information to make educated decisions. These opinions may perhaps be due to the interest Buffett has and needs to defend. He has a good investment strategy that has worked for many years. Why fix something that is not broken. If something works, it's ok to continue doing the same thing. There is no need to try something new. But this strategy involves holding a lot of cash in USD. While USD continues to lose its purchasing power over time and bitcoin keeps gaining purchasing power over time, this might be against Buffett and Berkshires’ financial interests. I believe this might be the reason, why Buffett continues to express negative views about bitcoin.
Now let’s look at why Charlie Munger is wrong when he says bitcoin is evil. I can agree with him when he says bitcoin is stupid, but for a different reason. I think it is a good thing for money to be stupid. We do want money to be stupid and just follow the rules. When money is smart, it may start doing things that go against the interests of those who hold this money. This is the case with USD and fiat currencies. Since USD is controlled by Federal Reserve, it means some smart people try to make smart decisions everyday to change how this money behaves. Since these just groups of people who are making these decisions, most likely they will be protecting the interests of the people who pay them to do this job. It is highly unlikely they will consider the cons and pros for all stakeholder of USD. USD is a global reserve currency. But US government and Federal Reserve act based on the national interest of the US. They don’t necessarily consider of the national interests of the rest of the world.
Munger is wrong when he says bitcoin undermines Federal Reserve system. Federal Reserve system undermines itself. It has been doing so since its creation. It was created with an idea of creating stability in US financial system and protecting people from sudden financial crises and recessions. It was created in 1913 but was completely unable to prevent the great depression of 1929. I would even argue they may have even be the reason that great depression happened in the first place. In 1944, Bretton Woods agreement made USD a global reserve currency. Back then USD had to have gold reserve. This promise was broken in 1972 when US declared it was no longer going to honor gold standard. Financial markets have been going through boom bust cycles, financial lives of people going from stable to crisis, all due to bad decision making by those who oversee financial system. My point is Federal Reserve has been its own enemy. It doesn’t need bitcoin or anything else to undermine it. It has been doing that itself just fine.
Bitcoin only offers an alternative in a very transparent and open manner, without any one entity or group dictating and changing the rules. How the bitcoin network works is quite brilliant. That’s however beyond the scope of this post, and I sure Munger and his team has access to all the information about the bitcoin code and how it works. It is true that bitcoin was created as a response to the financial crisis. How is offering a solution to major problem considered as undermining the federal reserve system? Solutions should be welcomed, studied, and analyzed by the systems that solutions trying to fix, so that these systems can take proper actions to make themselves work better.
For example, let’s say I have been using Comcast or Xfinity for a while. This company had a monopoly in my region and was the only way to access internet. Yet, this company offered very poor service, bad customer service, constantly overcharged, used deceptive tactics to extract more money from its customers. Since it has a monopoly, there is no other alternative to access the internet and we the customers must use Comcast/Xfinity. While making a lot of money this company never attempted to innovate, improve service, and never lowered fee, instead kept increasing in every opportunity they had. This is a really bad system. Now, out of nowhere new company emerges due to innovation in technology, and Zipply Fiber offers alternative option to access the internet. Being tired of bad experiences with Comcast/Xfinity, I choose to leave them and use the new system, Zipply. Would this be considered Zipply is undermining Comcast/Xfinity? Of course not. This is called fair competition. Customers are free to choose what they like to use if there are options available. It is no brainer we would go for a better and cheaper option.
Instead of being mad at Zipply, now Comcast/Xfinity should probably consider the reasons why its long-term customers all the sudden abandoning them. This kind of thinking may lead Xfinitiy to improve its services and offer something better than Zipply. If they do that, then maybe I will come back to use them again. If they just say Zipply is undermining them and just work on banning Zipply from their region using their connections in power, then perhaps Xfinity shouldn’t exist altogether.
Munger has made fortune investing in free market economies and being empowered by free entrepreneurship was able to reach these highs and build a decent reputation as a great investor. I find it strange someone like him, would go against free market and fair competition. Money doesn’t have to be controlled by a monopoly. Money too can have competition and competition can make it better or at least provide options for people to choose. Money simply is a system of transferring value. If one like to do so using USD, fine. If they choose to do that using bitcoin, that should be ok too. Just like email and messaging offered better way of communicating instead of writing letters, bitcoin is also offering a better way of preserving wealth, property rights, and transferring value. There isn’t much Federal Reserve or government can do about it. Maybe governments can ban bitcoin, like Chinese government did. But governments cannot outlast technology. They can barely keep up with it. The fact of the matter is bitcoin is here to stay, and not going anywhere, not even to zero.
I find it bizarre how Munger was praising Chinese government for banning bitcoin, and kind of suggesting the same to be done in the US. Wouldn’t such actions be evil? Denying people the option of using certain technology just because you happened to believe in USD or heavily invested in it? Bitcoin is an open network. Anybody is welcome to participate. Anybody is welcome to study the code, contribute to it, talk about it, criticize it, etc. All transactions on bitcoin are transparent and are stored in public ledger. Federal Reserve on the other hand is a closed system. Only few select are allowed to be part of the group. Not even US government can audit their books. Can someone tell me whether evil actions are more possible in a closed system or an open one? It seems to me Charlie Munger is confusing the concepts of free market or showing no regard to them. It also seems like Munger’s opinions are result of his stakes in USD and traditional financial systems. For these reasons I think just like Buffett’s arguments against bitcoin, Munger’s arguments are wrong as well.