On Cryptocurrency, Will Warren Buffett Have the Last Laugh – Again?
Recently, the billionaire investor Warren Buffett told CNBC, “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” In 2014, Buffet similarly remarked of Bitcoin, “It’s a mirage, basically. It’s a method of transmitting money. The idea that it has some huge intrinsic value is just a joke in my view.”
Is he right?
Back in 2000, just before the burst of the dot-com bubble, Buffet took a similar position toward the internet companies fueling that craze. When everyone was going with the trend and making money, Buffett was losing on his value investments. In December of 1999, Barron’s wrote, “After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.”
But when the bubble did burst, the BBC reported, “Investor Warren Buffett took a pasting for ignoring the 1999 surge in dot-com stocks. Now, he is enjoying the last laugh.”
Is history about to repeat itself? Is Buffet right that cryptocurrencies are a “mirage”?
To answer that question, we must first make a distinction between blockchain, the technology, and cryptocurrencies, the currencies created using the blockchain technology.
It is vital to make this distinction for the same reason it was vital to make the distinction during the dot-com era between the internet – the technology – and the dot-com companies using this technology as their business model. Hundreds of companies with web-based ideas went and raised capital, and money was pouring their way. But then reality kicked in during March of 2001. Companies such as Pets.com and Webvan failed completely. Worse, companies such as WorldCom were revealed to be using fraudulent accounting methods. Only a select few companies, like Amazon, Ebay, and Qualcomm, managed to weather the storm.
There is no doubt that the internet is an incredible technology without which we could not imagine our lives today. As with any new technology, many have tried and will continue to try to use it to create products, services, or assets which they believe have merit. It is the market and time, however, that will determine the validity and usefulness of these things.
The internet as a technology has never been the problem. Rather, it was what people were trying to do with it that was in question. We all know today that not every idea based on the usage of the internet is worth pursing. Today, when someone comes up with an eCommerce idea, we are more skeptical. We don’t immediately assume the idea is worth a fortune. Back in the ’90s, however, the internet was new and exciting, and every dot-com idea seemed glorious. At the end of the day, it is the “old-fashioned” metrics of fundamental value and business model that make the difference between a Pets.com and an Amazon.
(Bear in mind that the conglomerate Amazon of today has come a long way since its starting point as an online bookstore. Who would have thought?)
Blockchain is a (relatively) new technology. Similar to the internet in the ’90s, many are trying to find ways to use this technology to create payment methods and currencies. Could it be that 20 years from now we will not be able to imagine our lives without blockchain? In my humble opinion, this is most likely so. Which cryptocurrency will be the Pets.com of the bunch and which will be the Amazon is yet to be determined. Will the vast majority of cryptocurrencies we know today become useless? Most likely. Some, however, will become prevalent payment/transaction methods.
One of Warren Buffett’s investment rules we should all learn from is: Invest in what you know. Knowledge is key. Knowledge is powerful. As Buffett recently said about why he does not invest in cryptocurrencies: “I get into enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don’t know anything about?” This is a golden rule to all investments! Learn about a product, asset, or security before you invest in it. Otherwise, your investing would be no different from buying a lottery ticket or playing the slot machine in Las Vegas.
This is not to say that you should not invest. On the contrary, you should. Bear in mind, though, that investing is not a gamble. You should not gamble your investments. You should do your homework, and then decide what the best action is for you.
Cryptocurrencies can be a bit confusing, but you can still study up on them. That is my task – to educate you! In future articles, I hope you will come to gain the knowledge and mastery you need to make a wise, educated investment.
Dr. Merav Ozair has more than 12 years of business and consulting experience and more than 15 years of teaching experience with both graduate students and financial professionals. Contact her at [email protected] or @HoliSym.