Warren Buffett, undeniably one of the most successful value investors of our time, has publicly sided with the likes of James Dimon, CEO of JP Morgan, in calling Bitcoin a ‘bubble’ and generally predicting its imminent implosion. Buffe his scepticism during a personal Q&A session for business students.
You can’t value Bitcoin because it’s not a value-producing asset. - Warren Buffett
And whilst I have the utmost of respect for Mr. Buffett’s success in traditional investments, I believe he is implicitly incorrect with his recent statement. Here’s why.
Buffett himself stated:
“Price is what you pay, value is what you get.” - Warren Buffett
Let us look at an example of a car. No, a supercar. A Lamborghini! The price tag of a 2017 Lamborghini Huracán starts around £155k, but what about the value? The thrill of 0 - 100km in 3.2 seconds. The touch of quality craftsmanship of the finishes. The enormous power and stability of a V10 engine. The ease of advanced technology that adapts to your personal driving style. Owning and driving a Lamborghini is a symbol of success and great achievement, and the fruits of hard labour. The personal fulfilment one feels on attaining such a prized asset simply cannot be measured in monetary value.
As you can see, price and value are, in fact, vastly different, exactly as Warren Buffett said.
He has, however, also openly admitted that he does not understand the business models of companies in the tech space, like Google, for example. When previously asked his opinion on Bitcoin, Buffet compared it to a cheque or postal order, essentially just a mechanism to transmit money.
Bitcoin cannot be compared to any existing business model, asset, or currency as it is revolutionary technology.
“I believe that the blockchain is, even now, ushering in a new economic and social paradigm that will rival, if not exceed, the impact that agriculture had in human society. Old paradigm constructs are meaningless in this new (bitcoin) world.”
As a value investor though, Buffett is attempting to analyse it based on the old paradigm of value creation. Stocks and shares values are derived from the performance of the company - its revenue and profit. Bitcoin does not have any of these aspects, and its value is in its qualities.
This is probably one of the most difficult aspects to grasp. In fact, Prince Alwaleed of Saudi Arabia recently made a statement to this effect.
"It doesn't make sense. This thing is not regulated. It's not under control. It's not under the supervision [of] any federal – elect – United States Federal Reserve or any other central bank." - Prince Alwaleed
The irony here being is that is exactly the point!
Bitcoin was created specifically to cut out meddling middlemen, and to counter the control held by government structures over personal finance. The technology does not need regulation. It does not need control. It does not need supervision. It fulfils these ‘duties’ itself by means of advanced mathematical equations and algorithms. The network runs on a distributed system of computers, found all across the globe. And each computer holds a copy of the entire blockchain. This prevents any one individual or organisation having ultimate control of the network unlike and in contrast to how the traditional finance system works.
In a world of fiat currency, there is no limit on currency creation. Government requests the central bank adds more to the supply, and they willingly oblige.
We will just add on a few zeros to this account here - there we go - all done!
The government gets to spend more money than they can ever collect in tax revenue. The central and commercial banks earn perpetual interest on loans they can offer thanks to the fractional reserve system. And do you know what we, as citizens, get? We get the bill in the form of inflation! We get an erosion of our buying power as our fiat currency devalues to provide value to the newly created supply (because it is not backed by any tangible asset). We land up paying more and more for our purchases. We are, effectively, paying more in taxes to the government as the value of their loan decreases. It is a sickening cycle of debt, and it exists because of the ability to create infinite currency!
Bitcoin, on the other hand, has a hard-coded, finite supply of 21 million bitcoins. These are issued into circulation at a predetermined and predictable rate, earned as incentive for miners to maintain the blockchain. With no risk of expansionary supply, we can rest assured that what will increase the price of bitcoin in the long-term is the basics of a free market - supply and demand. As supply is limited, and adoption grows day-to-day, so the bitcoin price will continue to rise. It is deflationary by design.
A crucial aspect of Bitcoin’s value is its utility. In fact, it is its utility where we have realised only a smidgen of what it can offer us and the generations to come. If we consider the beginning of the Internet, what it started as was a technology that allowed for the flow of information. However, it was not until interfaces and applications, such as email and browsers, were developed did people fully understand how they would benefit. How this would become useful in their lives. And seeing where we are today in terms of the Internet it is boggling to see how ingrained and entrenched it has become in our everyday lives, not so?
If we think about Bitcoin in the same light, it can be considered the Internet of money. We no longer need to rely on a third party to provide us permission to financially transact. This opens the doors for scores of previously unbanked individuals to become economically active. What's more, it does not matter where that person is located. Bitcoin is borderless and enables global trading and transactions at a fraction of the cost and time to do so using traditional financial institutions.
As money, and not a currency that loses value over time, Bitcoin can be used to hedge against losses in currency-based markets. As money, we can use it as a medium of exchange for purchases. All of this is available to us right now.
With ongoing development by an exploding number of Bitcoin-based businesses it is not long before we see a plethora of applications, that use the underlying technology as the backbone of their offerings, come to fruition. Bitcoin has the potential to positively disrupt just about any industry you can think of.
And therein lies the value, Mr Buffet.
It may not be what you are accustomed to in terms of revenue and profits, but I believe it offers something more than money. It unshackles me from the traditional financial system of debt, interest, inflation, distrust, corruption, collusion and control. I can sleep soundly at night knowing that I am ultimately the sovereign of my money. It can not be restricted, it can not be taken from me and I can spend or save it as I choose, whether that is with my friend who lives next door, or an artist living across the globe. Bitcoin empowers me and I consider that invaluable. And based on the rampant growth and demand I would venture to say that there are many more who would agree!
Photo credit: aisletwentytwo3