The “coolest” investors in the world VS Bitcoin

Warren Buffett and Charlie Munger are best known as the creators of Berkshire Hathaway. Berkshire is a public holding company-a conglomerate that has consistently shown exorbitant profits over the past few decades compared to market indices.

Buffett and Munger are undoubtedly among the best and most respected investors in history. They led Berkshire Hathaway to an average annual return of 20%, compared to the SnP500’s average annual return of 10%.

At their recent annual meeting, Buffett and Munger condemned Bitcoin and cryptocurrencies.

When Buffett was asked about Bitcoin, he initially did not want to express his views, so as not to anger the bitcoin community, but later he relaxed and called Bitcoin a modern “tulip bulb”, in connection with the first recorded bubble in Amsterdam in 1636.

The tulip mania increased the price of tulip bulbs by 10 times within 8 months, and at the peak they cost the same as a small house in Amsterdam.

Previously, Buffett called Bitcoin “rat poison” and “delusion”. So, it’s safe to say that he is not the biggest fan of cryptocurrency.

Similarly, Charlie Munger has not held back his criticism of Bitcoin and cryptocurrencies. He said: “I think that all this damned development is disgusting and contrary to the interests of civilization.”

He also said that he hates the recent increase in the BTC, claiming that the currency was “created out of thin air” and is the number one “going to pay criminals”.

So they’re right?

It’s hard to argue with Buffett and Munger, given the excellent investment experience in the stock market throughout their lives. They are undoubtedly one of the greatest investors and thinkers in the history of finance and investment. However, it is likely that they missed the essence of cryptocurrencies.

Analyzing their opinions and concerns about Bitcoin and cryptocurrency, it is useful to first understand their investment thesis and prospects over the years.

Buffett and Munger are very valuable investors. They are students of the great investor Benjamin Graham and are looking for undervalued companies with strong balance sheets and moats, which means a high barrier to entry to the market for competitors.

Berkshire Hathaway owns companies such as Coca Cola, Heinz Kraft and Geico. For many years, they have resisted investing in growth stocks, and have focused exclusively on companies with positive cash flows and strong balance sheets.

The premise of investing in value is to estimate the intrinsic value of the underlying asset. Buffer and Munger are two of the greatest investors who have used this approach.

However, both Buffett and Munger use the same strategy and structure to evaluate cryptocurrencies. They both analyze the basis of Bitcoin as if it were a company. Bitcoin and cryptocurrencies do not behave like companies.

Cryptocurrencies are the building blocks and the framework of the new global financial system. They eliminate the need for centralized parties to verify and confirm transactions, replacing them with blockchain technology.

According to Buffett, cryptocurrencies “basically have no value.” The decentralized nature of cryptocurrency generates a new paradigm and, therefore, cannot be analyzed or evaluated as a traditional stock or company.

Metcalf’s Law

The value of Bitcoins is due to their rarity and network effects. The maximum number of existing BTC will never exceed 21 million.

Metcalf’s law states that the value of a network is proportional to the square of the number of connected users. The value of Bitcoin as a distributed decentralized network increases with each new node or connected user.

Bitcoin and other cryptocurrencies derive their value from their utility and the problems they solve. This is an issue that was not discussed at the Berkshire Hathaway annual meeting.

Cryptocurrencies strive to make a financial system for everyone. Due to their decentralized nature, they eliminate the need for centralized third parties. In the past, these centralized companies charged incredibly high fees for international money transfers, which disproportionately affected poorer countries and individuals who often used money transfers. Cryptocurrency provides a fairer solution to this problem.

It is impossible to compare Bitcoin with the tulip mania in Amsterdam in 1636. The technical document of Satoshi Nakamoto opened a new era of monetary history, when a person has full autonomy and does not need the permission of a third party to make transactions with value. The utility supported by cryptocurrencies benefits all participants of the system. The same cannot be said about tulip mania, since it was fueled by greed, and the cryptocurrency revolution is fueled by promises and potential.

Bitcoin and Crime

Detractors of Bitcoin have long argued that it is a means of facilitating criminal activity. Charlie Munger shares this opinion. He said that ” Bitcoin is a payment method for criminals.”

Many studies have been conducted to determine the level of criminal activity using Bitcoins. Analysis conducted by blockchain analytics companies such as Chainalysis has helped debunk the idea that Bitcoin is mainly used for illegal activities. The estimated amount of money laundered is 2-5% of global GDP ($800-2 trillion), while the total illegal value, including money laundering related to cryptocurrency, is 0.34% ($10 billion) of the transaction volume.

According to the ChainAnalysis report for 2021, criminal activity accounted for 2.1% of the total volume of transactions with cryptocurrency.

Transactions are recorded in the blockchain and are visible to everyone. Transactions are more transparent on the Bitcoin blockchain than anywhere else. The argument that criminals use cryptocurrencies to carry out their illegal activities is weak.

A counter argument can be made that criminals use fiat currency for their transactions, so we should ban any fiat currency. Bitcoin is not to blame for criminal activity, and does not encourage it.

Paradigm Shift and Investing in Value

The widespread adoption of technology occurs when the system is reliable and its value is recognized by the public. To evaluate these measures, let’s talk about utility value and speculative value.

Utility refers to the benefits of a technology that are reflected in its needs.

Speculative value is when investors believe that the technology is worth what it should be expected, based on future expectations.

Both factors are important for the development of the system. The utility value is unreasonable if the speculative value does not grow, and, conversely, the speculative value is artificial if the utility value does not follow.

The recent growth of Bitcoin is supported by both aspects. Its ecosystem has matured, which has led to the emergence of more applications in real life. In anticipation of its wider spread, financial institutions began to delve into the cryptocurrency space, which led to a strong influx of capital.

Unlike the retail frenzy of 2017, Bitcoin’s recent rise is partly driven by the interests of financial institutions.

A shift in narrative and perception

The views of financial organizations on bitcoin are changing. Take, for example, MicroStrategy, which has more than 108,000 BTC. And no Buffets and Mungers will be able to influence this.

The narrative has also changed to recognize Bitcoin as a financial asset for a potential means of saving, mainly due to its limited supply, as well as a candidate for consideration when diversifying the portfolio.

The current inflationary and low-yield environment contributes to the description of financial assets, as paper money and bonds become less attractive means of preserving value.

 

In addition, the companies’ plans to accept bitcoin applications and blockchain technologies demonstrate one aspect of the usefulness of the BTC. Its growing influence has increased the interest of end customers in exploiting the potential of this new technology. Their interests, in turn, prompted asset managers to include them in portfolios.

The structurally basic BTC network has matured since its birth. The fact that the BTC has been in existence for more than eleven years indicates its operational suitability.

Not only have the mining machines used today become much more advanced, but the number of miners and users has also significantly expanded: currently there are more than 76 thousand mining nodes, and 1.2 million mining nodes. active bitcoin addresses.

Institutional investors now have more tools to gain access to crypto. Bitcoin futures have grown significantly over the past years. We are also witnessing the expansion of the European bitcoin-ETP market, as well as the emergence of the bitcoin-ETF market in North America. Moreover, exchanges such as Coinbase and Gemini are creating trading systems similar to equity instruments in order to bring the traditional experience of working with securities to the world of cryptocurrencies.

The expansion of the Bitcoin network has eased institutional investors ‘ concerns about legitimacy. The development of the asset’s trading infrastructure has opened the way for institutional investors.

Conclusion

Cryptocurrencies have marked a significant paradigm shift in our financial system and culture. Investors who invest in value are not particularly interested in new innovative technologies, since today they are more interested in the cash flows of the business. This is a perfectly reasonable strategy.

Therefore, it is not surprising that the two most famous and most expensive investors are not interested in cryptocurrencies. Bitcoin marks a significant moment in our technological development as a society, and its true potential can only be fully realized after it changes our society.

As was the case with the Internet in the early 2000s, many people recognized that this was a serious achievement and opportunity, but the true potential in terms of many billion-dollar companies created becomes obvious only in retrospect.

The value of cryptocurrencies in terms of the benefits they have provided to everyone in this new financial system is still developing and is in its infancy.

Thus, Buffett and Munger will never invest or buy cryptocurrency, and this is normal. They are valuable investors in their trading, and no one expected them to take advantage of a new technology such as blockchain. Throughout their investment career, they avoided investing in new innovations, and preferred to invest in well-established companies.

Both the cryptocurrency community and Buffett may be right. It can still bring huge profits on the stock market, because it is a valuable investor, and cryptocurrency can still become a major distributor in our financial system and society. They do not exclude each other.

The advantages of cryptocurrency will become even more obvious in the next few years, just as the Internet has developed over the past two decades, and has provided value and autonomy for people around the world.