Charlie Munger Commentary Warren Buffett

Commentary: Buffett and Munger Right on Cryptocurrencies, So Far

(BRK.A), (BRK.B)

It’s no secret that Warren Buffett and Charlie Munger have been famously down on cryptocurrencies.

“Bitcoin is like rat poison squared,” Buffett said during the 2018 Berkshire Hathaway annual meeting.

That Buffett, and Berkshire’s vice-chairman Charlie Munger, are naysayers on cryptocurrencies is no surprise. As the world’s leading value investors, speculative assets are exactly the things they avoid.

While Buffett’s “rat poison,” comment did not come with a detailed explanation, it was, however, supplemented by Munger’s take that cryptocurrencies are “totally asinine.”

On the speculative trading frenzy that bid prices up to astronomical levels at the end of 2017, that didn’t impress Munger much either.

“Someone else is trading turds and you decide I can’t be left out,” Munger noted wryly.

Since May, cryptocurrency prices have continued their downward march, including heavy selling on Monday and Tuesday.

Why? Perhaps it’s because the highly touted utility of Bitcoin, Ethereum, etc. have yet to prove compelling to anyone but speculators.

A Currency, or a Speculative Asset?

People that tout Bitcoin and other cryptocurrencies are really believers in the rise of a nonproductive asset that is no different than gold, silver, or the alligator infested swamp land offered during the Florida land speculation of the 1920s.

Cryptocurrencies are an asset that is moving up or down daily based on what Benjamin Graham would have called speculation, and what can also be called gambling.

Devotees will wax poetic about the unique properties of blockchain, the supposed anonymity of cryptocurrencies, and other virtues of virtual currencies that show its utility, but to do that is to ignore that these assets are not being bought and used as what they are touted as, currencies.

After all, a currency is supposed to be a medium of exchange between two parties for goods and services, not a speculative asset class that you stash in your safety deposit box on a thumb drive.

As for its unique utility, that also hasn’t impressed Munger all that much.

“The fact that it’s clever computer science doesn’t mean it should be widely used, and that respectable people should encourage other people to speculate on it,” Munger said on CNBC’s Squawk Box.

Put aside its so-called utility, let’s talk about why people really got excited about Bitcoin in the first place. It inflated in value at an astronomical rate, and people were becoming cryptocurrency millionaires or billionaires overnight without doing anything.

But wait, this extreme bidding upward in the marketplace is not a feature of currencies. It is a feature of speculative asset fevers reminiscent of the Dutch Tulip Mania of the 1500s.

While historically currencies have periodically plunged in value due to hyper-inflation (just look at Venezuela to see that phenomenon), the same process does not happen in reverse.

There’s a simple explanation for that. Plunging values for currencies reflect a lack of faith in a currency as a method of exchange. The more extreme that pessimism, the more currency it takes to overcome it.

But, currencies of the more sound variety, which in essence have more faith placed in them by creditors, do not get bouts of extreme faith that shoot them up astronomically. They increase or decrease in a much narrower range.

Accepting Bitcoin as a currency is no different than asking to get paid in casino chips or lottery tickets. You are hoping for a second transaction to determine its value. At the casino it’s spinning the roulette wheel, and with cryptocurrencies it’s betting in the marketplace that someone will pay you more for your Bitcoins than the valuation you got them at.

All speculative bubbles are full of enablers. They are so-called experts that tell you why this time is different, hucksters telling the masses not to be left out, and true believers that have adopted the asset as a religion.

It’s a familiar tale that always has a sad ending for all but a few.

“Bitcoin is worthless, artificial gold,” Munger noted on Squawk Box. “Now that is not something I think the world needs.”

So, far, both Buffett and Munger are being proven right.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.