Now, in 2017, the bitcoin “mirage” apparently isn’t a mirage anymore after it has topped the billionaire net-worth. According to Warren Buffett, it’s a bubble and “You can’t value bitcoin because it’s not a value-producing asset.”
This is the same criticism that “value investors” like Buffett or supporters of the fractional reserve banking model like JP Morgan’s David Kelly often levy against gold. It has no intrinsic value (nothing does), and “does not provide any cash flow, a right to future earnings,” and so on.
Which, when it comes to traditional equity or debt, claims against assets and capital help value investors estimate present values using the discounted cashflow model or PE multiple.
It could be noted that this is not really an intrinsic value as such, and TDV’s Senior Analyst, Ed Bugos, has written an extensive critique of the value investing approach in his book “Defensive Investing: A Beginner’s Guide and Primer To Investing Within the Context Of Business Cycles and Sectors” (which is available for free to TDV subscribers), and deals with the effects of the Fed on investing post-1929.
Buffett ends a few weeks where Jamie Demon, Ajay Banga and the Prince of Saudi Arabia have attacked bitcoin.
Notice what they all have in common? They are beholden to the fasco-communist crony rigged market system, and like to echo the establishment’s narratives, often without thinking. They don’t understand money, or economics, the causes of the business cycle, or even the source of innovation itself.
And, yes, Warren Buffett may be one of the best value investors of all-time, but he is completely ignorant on money.
Interestingly, his father did. But Warren was a spoiled rich kid who didn’t even take notice when he had one of the smartest men in the world when it came to understanding capitalism and money, Murray Rothbard, at the dinner table as a child.
Warren hated economics, unlike his gold loving and much smarter father. Warren’s hate for gold likely stemmed from a hatred of his father.
But now this hate has broadened to bitcoin, calling it a bubble.
As a TDV reader, you know bubbles are a monetary phenomenon. They are caused by the creation of money (unbacked fiat) out of thin air, manufactured by the fractional reserve banking system, supported by government and central banking legislation, and legal tender laws forcing merchants to accept a currency they wouldn’t accept otherwise if they were not forced after gold was outlawed as money in the USSA in the 1930s.
This entire apparatus is necessary to support the banking system because the model is bankrupt and fraudulent. This is the system that Buffett and Demon support. And the reason that Buffett hasn’t had a great track record in calling tops and other bubbles is because he doesn’t get the difference between the thing called an “asset” and the thing called “money.”
If he listened at the dinner table more often he might have realized that money is an entirely different kind of economic good. It is not an asset. The problem of valuing gold or bitcoin cannot come down to measuring future earnings power or extrapolating yields because they are not equity or debt. They are commodity-assets of a particular kind: monetary.
Rothbard and Mises had a lot to say about the way money is valued. Foremost, it is subjective. It has to have an initial objective value, but its ultimate valuation is 100% dependent on only one thing – how many people eventually adopt it. The more it is adopted, the more it grows in value. This is how all money became money.
Its circulation spread and as it was desired more and more as a currency or money, its original value would grow. The value of gold as money is many times greater than that of gold as a mere commodity before it was adopted by humans as money.
It is because Warren – and other value investors who still live in the pre-1929 Benjamin Graham world don’t grasp these points that they are stuck in the past, looking at reams of historical data and applying a straight line in extrapolating it out into the future rather than thinking about the source of change and the role of money and technology in our society.
If Warren paid attention, he’d notice that there are giant bubbles everywhere. There is the bubble in equity on Wall Street; there is the bubble in real estate prices (again), there is a bubble in government bonds, in art, collectibles, and the US dollar.
Not that a bubble hasn’t formed in bitcoin now. If the definition of a bubble is that buyers are buying it only because it has been going up and for no other reason other than that they expect it will continue to then it might be a bubble. Or it might not.
There’s no point in rehashing the value of blockchain here. We know it has value and many bitcoin buyers are, if anything, guilty only of looking out too far ahead in how the blockchain (and the tokens) are going to change the economy, a task that “value investors” detest.
They hate looking into the future. In my opinion, that makes them historians rather than value investors, and they generate returns by the sole virtue of the subsidy the Fed provides.
If there is anything that investors are buying just because the price is going up despite the fact that it is overvalued or the fundamentals are not there, look no further than stocks and bonds.
Warren may feel comfort in the historical basis of his calculation of future earnings and present values in the same way that some gold bugs feel comforted by the tangibility of gold in the face of the superior monetary features of bitcoin. In both cases, a backward-looking analysis and a false sense of security are perhaps at play.
Certainly though, it is remarkable that we live in a sea of bubbles everywhere fueled by the world wide suppression in interest rates and constant expansion in unsound guvmint money, and out of this vast sea of bubbles, the Buffetts of the world pick on the smallest; bitcoin!
Bitcoin has a total market cap of about $100 billion currently. Warren Buffett, one man, has a net worth of $80 billion… Warren could, if bitcoin holders were foolish enough to sell at these prices, buy nearly all the bitcoins in the world. Yet, he calls bitcoin a bubble.
I call Warren Buffett a bubble. About to pop.
It’s not really his fault… he’s incredibly old. I’d have to check exact dates, but he may have been born before the Gutenberg press was invented. How could he possibly understand what is currently going on?
In fact, Warren Buffett is famous for saying “Never invest in a business you cannot understand.” This was after he was asked about missing out on the opportunity to invest in Google and Amazon.
So, at least he understands his limitations.
That is very wise. No investor should ever invest in something they don’t understand.
So, don’t invest in it Warren. By the time you are looking to invest in blockchain technologies (which likely is never at your age), it will likely be time for us to sell.
But that’s still a long way down the road.