Despite My Foregone $770 Million Gain, Buffett Is Right To Shun Bitcoin


About 11 years ago, I made a very expensive decision not to buy Bitcoin. I estimate that cost me three quarters of a billion dollars. Yet I stubbornly stick with the logic — that Warren Buffett so beautifully articulated on April 30 — to avoid Bitcoin.

Bitcoin has come a long way since 2011 when I first wrote about it. But the question I raised in December 2017 — is Bitcoin worth $0, $20,000, $200,000, Or $∞? — still burns bright in my mind.

In the debate between the Bitcoin bulls — such as Elon Musk and Peter Thiel — and bears, I am siding with Warren Buffett and the Wikimedia Foundation who are not fans.

I wish I had invested in Bitcoin back in June 2011. As I wrote back then, the hack of Mt.Gox, a Bitcoin exchange sent its price from $17.50 to “pennies.” Just for fun, what if it was worth a nickel a Bitcoin back then and I had bought $1,000 worth? Today, those 20,000 Bitcoin would be worth a cool $770 million — down 40% from its November 2021 high.

Back then I argued that Bitcoin — then an online currency used to buy Alpaca wool socks and illegal drugs — might survive, as PayPal did, if there was a compelling reason for the consumers, merchants, and payment platforms to adopt it. Otherwise, it would go extinct as did Digicash, Flooz, and Beenz.

As we now know, Bitcoin survived.

Is Bitcoin Worth $0 Or $∞?

In 2017, I wrote that Bitcoin’s value was imprecise and arguments could be made that it is worthless or potentially have infinite value — which I dubbed Theory 1 and Theory 2.

Theory 1. BTC is pure emotion punctuated by periodic theft

In this theory, people buy or sell Bitcoin in a wave of fear. Specifically, they are afraid of missing out on further appreciation in Bitcoin’s price. For those suffering from such fear, there is plenty of evidence to support their belief.

For example, the compound annual growth of Bitcoin between early June 2011’s $17.50 and May 3, 2022 was 101%. At the same time, I was not surprised — based on my writing about Mt.Gox that on December 6, 2017 $70 million worth of Bitcoin was stolen.

Of course, hacking cryptocurrency has not ended — last month the U.S. Treasury Department alleged that North Korean hacking group Lazarus “is tied to a more than $600 million theft of cryptocurrency from the Axie Infinity-linked Ronin bridge,” according to Coindesk.

On the other hand, Bitcoin exchanges have become better established since then. Coinbase and Binance are two well-known U.S. cryptocurrency exchanges — with Time giving the edge to Coinbase since it’s publicly-traded and it is the “easiest exchanges to use, with an intuitive interface, as well as a variety of options for using fiat currency to make purchases.”

Nevertheless, the 40% decline in the price of Bitcoin since last November does keep in the forefront the question of what could stop it from going to 0.

Theory 2. BTC will make the world run more efficiently

Another way to think about Bitcoin is that it is like a publicly-traded biotechnology company with no revenue. However, instead of having to overcome scientific and regulatory hurdles, BTC must overcome the resistance of people and companies to use the cryptocurrency to transact business.

Aaron Brown, a Bloomberg columnist who owned Bitcoin in 2017 argued that Bitcoin was worth $20,000 each. His logic was that crypto’s code base had “the potential to significantly expand the value of internet activity, and to add new valuable activities.”

To arrive at his $20,000 figure, he estimated that the Internet represents 6% of the $75 trillion global economy and that crypto can add 2% to that fraction — half of which will go to investors. “If I take 2% of the $75 trillion global GDP, divide by two for the fraction going to investors, multiply by 70% to get the necessary bitcoin value to support that activity, and divide by 21 million bitcoins, I get $20,000 per coin,” Brown wrote.

In 2017, my concern was that Bitcoin — which was unregulated — could seriously destabilize the world’s financial system if traditional financial institutions decided to get involved.

But now, Fidelity Investments — the U.S.’s largest 401(k) plan provider, acting as custodian for 23,000 plans, which have 20.4 million participants, representing $2.7 trillion in assets under management — is doing just that.

In late April Fidelity announced it will offer Bitcoin as an investment option in its 401(k) plans by the middle of 2022, according to CNN. The Labor Department expressed deep concern “about the prospect of 401(k) participants being exposed to the extreme volatility of crypto trading.”

Bitcoin Foes: Buffett and Wikimedia Foundation

Bitcoin is not universally loved as an investment — Buffett and the Wikimedia Foundation oppose it.

Buffett: Bitcoin is “Probably Rat Poison Squared”

At Berkshire Hathaway’s

BRK.A
annual shareholder meeting on April 30, CEO Warren Buffett prefaced his remarks on Bitcoin by saying that he does not like people “stepping on [his] windpipe” however, he still does not see the value in Bitcoin.

Buffett’s argument is like the one I made in 2011 — Bitcoin is not useful. According to CNBC, he said, “If you said… for a 1% interest in all the farmland in the United States, pay our group $25B, I’ll write you a check this afternoon…Now if you told me you own all of the Bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it?”

Unlike apartments that produce rental income or farmland that produces food, the only way to get value from Bitcoin is to sell it to someone else. “That explains the difference between productive assets and something that depends on the next guy paying you more than the last guy got,” Buffett said.

He explains the price of Bitcoin as magic. While Buffett does not know whether Bitcoin will go up or down in the future, he concluded “the one thing I’m pretty sure of is that it doesn’t multiply, it doesn’t produce anything. It’s got a magic to it and people have attached magic to lots of things.”

Wikimedia Foundation: Bitcoin is Extremely Risky and Inherently Predatory

The organization that runs Wikipedia — the Wikimedia Foundation — decided this month to stop accepting donations in cryptocurrency form.

The reason, according to Wikipedia editor Molly White, is that accepting crypto donations was a tacit endorsement of “extremely risky investments” and technology that are “inherently predatory”—and, certainly when it comes to the leading virtual currencies Bitcoin and Ether are “extremely damaging to the environment, ” according to Fortune.

The Wikimedia Foundation is not alone. In January, the Mozilla Foundation—which produces the Firefox web browser— “paused crypto donations because their environmental impact did not align with its climate goals. Moreover, Tesla used the same reason nearly a year ago to stop accepting Bitcoin payments for its cars, noted Fortune.

Bitcoin Fans: Musk and Thiel

Speaking of Teals, like populist politicians, Bitcoin proponents Elon Musk and Peter Thiel offered ad hominem attacks in response to Buffett’s comments on Bitcoin.

Musk mocked Buffett’s physical health in his remarks. According to Forbes, he said, “Haha, he says ‘bitcoin’ so many times,” [in response to Buffett’s annual meeting comments — calling it wild that Buffett can attack Bitcoin] while nakedly shilling diabetes — [referring to Buffett surrounding himself with boxes of See’s Candies on stage].”

In March, Peter Thiel — like Musk a PayPal cofounder — called Buffett the “enemy No. 1” of Bitcoin describing him as a “sociopathic grandpa from Omaha,” according to SeekingAlpha reported.

The logic of investing in Bitcoin still escapes me and I wish Musk and Thiel — rather than name-calling — would offer a rational counterargument to Buffett’s view.



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