
Warren Buffett: Bitcoin Is Pure FOMO - jamix
https://secure.marketwatch.com/story/heed-warren-buffetts-warning-bitcoin-is-pure-fomo-2017-12-26
======
mholmes680
"Rather, dollars are a temporary store of value, a means of transmitting that
value from one person to another. As Buffett says, valuing bitcoin is like
trying to value a paper check drawn on a bank. Pointless."

I agree with the premise of the article, but isn't this quote a jump from
that? Whats preventing bitcoin from being a temporary store of value to
transmit from one person to another; Isn't there a second argument to be made
on why its a bad _currency_ or not? I think something like this article:
[https://www.bloomberg.com/view/articles/2017-12-27/bitcoin-i...](https://www.bloomberg.com/view/articles/2017-12-27/bitcoin-
is-an-implausible-currency)

~~~
noncoml
> its a bad _currency_

The problems that I see are:

1\. There is a finite number of bitcoins, which means you can never have
inflation, or in other words the bitcoin price is only going up tomorrow. So
it doesn't make sense for people to spend it.

2\. Mining. It costs a lot to mine a bitcoin. Imagine if the US government had
to spend 1 billion worth of energy to print 1 billion dollars.

I think Bitcoin was designed to be analogous to gold. We stopped using gold as
currency many years ago.

But then again, I know little about economics and finance, so don't take my
word for it.

~~~
dpc_pw
> or in other words the bitcoin price is only going up tomorrow. So it doesn't
> make sense for people to spend it.

Yes. That's why I've never bought a computer - next year there will be a
faster and cheaper one on the market. And that's why people regularly starved
before fiat currencies were introduced. They were just hoping they can buy
more food tomorrow for the same money.

People don't need encouragement to spend. They need encouragement to save.
Whoever thinks otherwise, should talk a bit about it with an average American.

Noone is going to stop spending because their currency will have 2% more
purchasing power in a year. And the economy would run much better if we
weren't wasting so many resources on shit that we don't need and never-ending
boom and bust cycles.

~~~
noncoml
> Yes. That's why I've never bought a computer - next year there will be a
> faster and cheaper one on the market. And that's why people regularly
> starved before fiat currencies were introduced. They were just hoping they
> can buy more food tomorrow for the same money.

> People don't need encouragement to spend. They need encouragement to save.
> Whoever thinks otherwise, should talk a bit about it with an average
> American.

> Noone is going to stop spending because their currency will have 2% more
> purchasing power in a year. And the economy would run much better if we
> weren't wasting so many resources on shit that we don't need and never-
> ending boom and bust cycles.

This of it like this: You have a currency that is giving a return of 3% per
year. Why would someone risk their money investing in existing or new
businesses/ventures?

~~~
dpc_pw
Because, after factoring-in the business risk, the expected return is 5%, and
5 is bigger than 3.

Or 10%, or 20%. Eventually, some business opportunities are better than
sitting on a pile of cash.

~~~
jhanschoo
You're adopting the micro perspective to a macro problem of a finite supply of
coins.

Finite supply means that on average, net coin-profit of a business is zero
coins. With such poor odds, why should someone go into business? Inflation
incentivizes investment since you know that on average, a business opportunity
has better ROI than saving.

~~~
dpc_pw
If you can produce 3BTC worth of goods using 2BTC, then people will pay you
3BTC.

Your doubts are based on the assumption, that somehow "there would be not
enough money", which is simply not true. During the process of producing and
trading goods money are not destroyed. They are just changing hands. There is
always enough money in the economy.

------
thisisit
Buffett has described investing as ability to find the right pitch to swing
at. He invests in companies which are within his "circle of competence":

[https://www.cnbc.com/2017/02/02/warren-buffett-simplifies-
in...](https://www.cnbc.com/2017/02/02/warren-buffett-simplifies-investing-
with-a-baseball-analogy.html)

This lesson is apparently lost on many people.

~~~
tedmiston
Buffett's whole approach to valuing companies to invest in doesn't really work
for tech cos, especially software.

~~~
sumedh
Why doesn't' it work for software?

~~~
nostrademons
He's stated it's because he doesn't understand it, but unpacking that...

Buffett's investment strategy is to run a discounted cash-flow analysis on the
stock's fundamentals to figure out its "true" value, and then only invest in
it if this is significantly above its market price.

Most consumer software companies have cash-flow graphs where they spend 5-10
years with zero revenue just gaining users and building a monopoly, then they
turn on the monetization strategy and instantly start making $10B/quarter or
so, and then they continue to make massive profits until some younger, cooler
software company comes along and takes all their users, and then they either
buy that company for a good fraction of outstanding shares or they die. In
other words, their cash flows are unpredictable and back-loaded, and depend
upon a number of factors that are unknowable early in the company's life, like
1) is there a viable monetization strategy? 2) when will the founder/CEO turn
it on? 3) will they run out of capital first? 4) how big will the userbase be
at the time? 5) will they be replaced by further developments in technology?

For an investor who wants predictability and rationality in investing, these
are anathema; it's like going to a casino where the house holds the
information advantage and hoping you can play enough rounds that you win.

------
XR0CSWV3h3kZWg
He didn't say that. That's what the author of the article said.

Of course Warren buffett doesn't like it. He has made his name on being able
to tell if a stock's price is above or below it's fundamentals. Bitcoin
doesn't have fundamentals and it doesn't pay dividends.

~~~
acoye
I would like to argue Bitcoin has a fundamental. The number of people using it
and making up its value.

`Metcalfe's law states that the value of a telecommunications network is
proportional to the square of the number of connected users of the system
(n2)`
[https://en.wikipedia.org/wiki/Metcalfe%27s_law](https://en.wikipedia.org/wiki/Metcalfe%27s_law)

~~~
lamontcg
If people start to run for the exits, then that number goes down and there's
no floor under that number. The system can unwind in a panic until nobody is
using the system and the value of the system becomes zero. Which means that
isn't any kind of fundamental value, you're just measuring popularity.
Fundamentals are supposed to provide support to value when a security becomes
unpopular and untrendy.

~~~
dilap
sure but that's the same as like banks and traditional money, right?

~~~
empraptor
With stable national currencies like US dollar, there are debts, expenses,
taxes, etc. that are denominated in the currency. And there is a national
economy producing products and services for which people can pay with US
Dollar. And financial infrastructure and laws to support the economy and
currency.

~~~
dilap
lots of examples of currencies getting inflated pretty badly. agreed the US $
has been stable for the last 30 years, and seems like a fairly safe bet. but
it also doesn't seem outside the bounds of possibility that something will
flip and we enter another period of bad inflation. (to me, gut feeling, zero
expertise in any of this -- just some guy on the internet, thinking about it
for fun.)

are contracts being written in bitcoin yet? if so, that'd be some momentum to
help keep the bottom from falling out.

and i don't think taxes are really denominated in USD: they are paid in USD,
but they are denominated in % of «taxable event», converted to USD, at
whatever the conversion rate happens to be. right?

i guess a national currency is a little more "real" than something like
bitcoin because you have one more-or-less guaranteed believer in it, the
nation issuer. but it still doesn't seem that different to me than something
like bitcoin. it basically just has value because it's useful for it to have
value, and it's made scarce enough that it can serve for that purpose.

~~~
empraptor
I see the difference as there being a national economy and government closely
tied to USD.

Usually, central bank tries to manipulate supply and velocity of USD so it
doesn't become too scarce. Because short supply of money leads to deflation
and stagnation of the economy.

------
juanmirocks
Sending small to large quantities of wealth worldwide quasi instantly and with
small fees does have a tremendous value. Ask families of immigrants.

Buffet hasn’t even invested in digital tech stocks. IMO, even after all the
huge respect he deserves, he doesn’t get this technology. Other than that, I
don’t doubt that many current “investors” are only FOMO movers

~~~
root_axis
When will this false narrative finally die? Bitcoin is practically _useless_
for remittance; I know this from first-hand experience. Bitcoin has to be
converted into useable money by the recipient and _that_ process is very
inconvenient, slow, expensive and possibly dangerous if you follow the advice
of bitcoin enthusiasts and meet up with random sellers in the street. All of
this also presumes the recipient is technically literate enough to use and
secure bitcoin without the sender being around to hand-hold them through the
process _and_ we must assume that they have reliable access to a
phone/computer and internet. I'm sure there is _some_ legitimate remittance
activity through bitcoin but it is very uncommon.

~~~
koonsolo
From the article at the bottom:

About a third of the customers queuing at La Maison du Bitcoin’s teller
windows in Paris aren’t speculating on the value of the cryptocurrency.
They’re sending digital money home to Africa.

“In many countries in Africa, there are far more cellphones than bank
accounts,” said Manuel Valente, co-founder of La Maison. “For bitcoin, all you
need is a phone.”

[https://www.bloomberg.com/news/articles/2017-11-17/bitcoin-e...](https://www.bloomberg.com/news/articles/2017-11-17/bitcoin-
emerges-as-crisis-currency-in-hotspots-such-as-zimbabwe)

~~~
coldtea
Is it true though? Or journalistic exaggeration of some insignificant (in
quantity) activity?

~~~
aiCeivi9
It is true, check for example [http://mgafrica.com/article/2015-03-03-mobile-
come-first-in-...](http://mgafrica.com/article/2015-03-03-mobile-come-first-
in-africa-before-electricity-water-toilets-or-even-food) . Paying by phone is
popular and has much lower bandwidth/storage requirements than bitcoin will
ever have: [http://edition.cnn.com/2017/02/21/africa/mpesa-10th-
annivers...](http://edition.cnn.com/2017/02/21/africa/mpesa-10th-
anniversary/index.html)

------
PakG1
Scrolling through these threads, I am surprised at how many people are
suggesting that Buffet just doesn't get it. That's possibly not wrong.
Buffet's desire to not get into stuff he doesn't understand is well-
documented. He traditionally has stayed away from tech investments for
primarily that reason, and definitely doesn't do bleeding edge tech when he
finally does do tech. As the OP alludes to, Buffet actually commented similar
stuff about Bitcoin already. His logic hasn't changed much from then till now
in terms of seeing what the endgame is. [http://www.businessinsider.com/why-
buffett-doesnt-invest-in-...](http://www.businessinsider.com/why-buffett-
doesnt-invest-in-technology-2014-3)

If people think Buffet doesn't get it, everyone's entitled to their opinion.
But if you want to say he's wrong, you should explain what's wrong with his
logic. The OP summarizes his logic really well, and I see nobody in these
threads taking apart his logic. Quoting the OP:

Intrinsic value is this continuous waterfall of cash. It’s not the stock price
of Coke but the actual cash flow of the business, after costs.

 _Buffett made his billions by divining when the gap is greatest between
intrinsic value and a stock’s share price, then buying loads of shares,
tickets to real cash flow other investors would want.

Given that bitcoin is supposed to replace cash, what is the ultimate source of
cash flow from digital coins created on the internet? It’s dollars flowing
from the pockets of buyers who want to own those coins.

Cut off the supply of new investors and the bitcoin craze ends.

The fact is, bitcoin has no intrinsic value at all. While many digital coin
“investors” would argue that neither does a dollar, I counter that just about
nobody thinks of American cash as an investment, except for perhaps currency
speculators._

Yes, I've seen a comment somewhere in here that says, "hey, aren't people who
buy American dollars currency speculators too?" Yeah, of course. But I don't
see anyone attacking the part about whether or not Buffet's fundamental
thinking of intrinsic value is applicable here.

I will point to another interesting article that summarizes similar thinking
in another way. This article is perhaps interesting because I've seen many
people here describe Bitcoin as digital gold.

[http://www.nasdaq.com/article/why-warren-buffett-hates-
gold-...](http://www.nasdaq.com/article/why-warren-buffett-hates-gold-
cm267928)

 _He considers gold a nonproductiveasset because it doesn 't produce anything
of value. To illustrate this point, Buffett proposed this thought experiment
in his 2011 letter to Berkshire shareholders:

"Today the world's gold stock is about 170,000 metric tons. If all of this
gold were melded together, it would form a cube of about 68 feet per side.
(Picture it fitting comfortably within a baseball infield.) At $1,750 per
ounce -- gold's price as I write this -- its value would be $9.6 trillion.
Call this cube pile A.

"Let's now create a pile B costing an equal amount. For that, we could buy all
U.S. cropland (400 million acres with output of about $200 billion annually),
plus 16 Exxon Mobils (the world's most profitable company, one earning more
than $40 billion annually). After these purchases, we would have about $1
trillion left over for walking-aroundmoney (no sense feeling strapped after
this buying binge). Can you imagine an investor with $9.6 trillion selecting
pile A over pile B?

"A century from now the 400 million acres of farmlandwill have produced
staggering amounts of corn, wheat, cotton, and other crops -- and will
continue to produce that valuable bounty, whatever thecurrency may be. Exxon
Mobil will probably have delivered trillions of dollars in dividends to its
owners and will also hold assets worth many more trillions (and, remember, you
get 16 Exxons). The 170,000 tons of gold will beunchanged in size and still
incapable of producing anything. You can fondle the cube, but it will not
respond."

So, instead of nonproductive assets such as gold, Buffett prefers productive
assets like farmland or companies that generate enormouswealth for
shareholders -- companies like Exxon Mobil ( XOM ) , Coca-Cola or See's Candy.

And he clearly explains why:

"Our country's businesses will continue to efficiently deliver goods and
services wanted by our citizens. Metaphorically, these commercial "cows" will
live for centuries and give ever greater quantities of "milk" to boot. Their
value will be determined not by the medium of exchange but rather by their
capacity to deliver milk. Proceeds from thesale of the milk willcompound for
the owners of the cows, just as they did during the 20th century when the Dow
increased from 66 to 11,497 (and paid loads of dividends as well).

"I believe that over any extended period of time this category ofinvesting
will prove to be the runaway winner… More important, it will be by far the
safest."

This last sentence is important. Investing in productive assets carries less
risk.

That's because, in the past,irrational exuberance has caused all sorts of
nonproductive assets to suddenly skyrocket beyond any sane measure ofintrinsic
value . The run-up on the prices of tulips in the 17th century is one colorful
example._

If Buffet is wrong, take apart his logic. Otherwise, we can only wait and see.
Me, I wish I'd gotten in on Bitcoin when it was $1, who doesn't wish that?
But... I have yet to figure out how the heck it's reaching these prices. I see
it, and it doesn't make sense to me. And I think I understand tech better than
the average layperson. In fact, the fact that it's so expensive _and_ volatile
makes it difficult to use even as a currency. That makes it even more of a
"nonproductive asset".

~~~
fragsworth
His logic is very clear, and makes a lot of sense. The problem with it is that
despite gold being a bad investment, its value is STILL $9.6 trillion. It has
value because it is effectively deflationary, and can be used as a risk-
management tool that works better than cash, allowing you to avoid inflation.

Buffet knows this, and I even recall that he bought a sizeable amount of
silver a while back. I assume he also bought gold before too. He doesn't put
the bulk of his assets in it. Most people don't. That's why Gold is only about
3% of the world's wealth.

Cryptocurrency's value is $600 billion, and by many arguments works better
than gold for this purpose. This suggests to me that it would replace gold,
making it potentially a good investment (even now). Once it replaces gold, it
then only becomes a good hedge, and no longer a long-term investment.

~~~
PakG1
Wow, well done. I haven't thought about that. That's interesting food for
thought. I guess time will tell.

------
keypusher
Buffett has never liked commodities or speculative assets. His primary
strategy is to invest in wealth-producing assets. For instance, he said he
would much rather own farmland than gold. And that's a great strategy. But
it's not the only viable strategy.

------
root_axis
Well that much is obvious. This doesn't speak to whatever utility bitcoin
might have, but the recent uptick in price clearly has nothing to do with
bitcoin's technical properties.

------
tfolbrecht
I appreciate the reporters critique, but what I believe they're missing is
that there's an inherent value in the network and its market share in the
space.

Bitcoin is not the check, it's the store of value and the bank. Bitcoin is the
investors, developers, the miners, the ledger, wallets(accounts), the
speculators, the store of value. Bitcoin is the headline maker in the WSJ,
NYT, etc. That multilayered coupling is what makes BTC valuable.

The reporter talks about intrinsic value of companies, cash flow etc. The
underlying healthy and stable economy is not some axiomatic truth. With BTC,
You have all of the components to have currency emerge into existence and stay
from bitcoins incentive system.

How much is it worth? That depends on what the alternatives are worth, and
that evaluation changes every day. I hope it's long term near worthless, but
you can never be too sure.

------
arisAlexis
I still don't undestand why HN instead of being at the forefront of innovation
aligns up with old school money. I guess most here are dependent n the old
system and VCs

------
fantasticsid
He has none but he could be shorting it?

------
down
Bitcoin saves lives in Venezuela, you people need to get your head from your
asses, first world is not the only world.

~~~
nugi
And bitcoin also pays for murders, launders money, etc. I feel, just as cash,
it is quite ethics agnostic. Not knocking cryptocoin, just don't pretend it is
a singular force for good. It is representation of capitol, albeit in a unique
way.

~~~
realusername
I highly doubt Bitcoin is much used for laundering money, transactions are all
happening in clear and if you try to hide traces by creating multiple
addresses you are going destroy your capital in transfer fees (which are very
high right now). It's clearly not the best currency to hide untraceable money.

~~~
byte1918
Wouldn't it be possible to temporarily switch to an intermediary altcoin (eg.
ethereum, btc) ? I'm not invested nor an expert in any crytocurrency, so
please correct me if I'm wrong.

~~~
realusername
Monero I think can be used for this, other main coins have a public ledger.

------
Kinnard
Does Warren Buffett understand digital signatures?

~~~
jopsen
The technology is not important to the value.

~~~
nwah1
Understanding the technology isn't, necessarily. You just need to understand
the value proposition, transaction fees, etc.

One can look at the balance sheets for TransferWise, and without understanding
a single thing about HTTP, web services, SWIFT, or any other detail one can
quickly get a sense that it is a viable business whose revenues exceed its
costs, and whose prices are competitive.

Same is true here. Warren Buffet is famously skilled at precisely this sort of
thing. Unfortunately for Bitcoin, he doesn't see the value.

------
aphextron
As someone completerly uninvested in this whole mania, I still see Bitcoin as
something with an inherent value. The real problem right now is that nobody
knows _what_ that inherent value really is. Even if the price were to crash
100x tomorrow, Bitcoin would still have _some_ value because of the energy
expenditure involved with Proof of Work. Of course people that are "investing"
in it now are simply gambling. But Bitcoin itself will pretty much always have
some worth because it will be impossible to recreate the amount of effort that
went into mining it.

~~~
aetherson
No, that's a fundamental misunderstanding of what value is. And a
manifestation of a common one!

Things don't have value because of how much it cost to create them. They have
value because of how much people are willing to buy them for.

If you and I both produce spoons, and the spoons that we produce are identical
in every way, but I have a more efficient manufacturing process and it costs
me less to produce those spoons, that does not make your spoons worth "more."
And, importantly for people who are drawn to this idea, we should not attempt
to legislate that your spoons are worth "more" for fairness reasons -- this
fundamental approach to value is exactly what creates incentives for me to
find efficiencies in manufacturing.

~~~
aphextron
The point I'm making is that it would still have value as a currency,
regardless of whatever the face price of USD value crashes to. It's something
that cannot be reproduced and is easily tradeable.

~~~
aetherson
Huh, okay, misunderstood you. That's a fair point.

------
KasianFranks
He's said in the past about technology and software that "I just don't
understand it" then he gives advice to people telling them not to invest.
Classic Buffett and if you think about that it makes no sense. He also
famously missed out on the appreciation of technology sector from about the
mid 90's onward. I wonder what he thought of Netscape giving away their
product freely while also being one of the greatest IPOs of all time.

~~~
oblio
1\. He seems to be doing just fine.

2\. Netscape, really? That was your best example of a thriving tech business?
You're making his point for him :))

------
alexeiz
It's all smoke and mirrors. Just as Dimon called bitcoin investors 'stupid' at
the very time he was already trading bitcoin, Buffett's downplaying of bitcoin
is also a sign that he wants to get in on the action.

------
brndnmtthws
It's interesting to note that most of the people who are pro-Bitcoin were born
after 1980 or so. Could it be that Mr Buffett just doesn't get it?

~~~
Cacti
Your argument is that one of the most successful investors in the history of
mankind is physically incapable of understanding Bitcoin investment (or
anything, for that matter) just because he's old?

~~~
adamnemecek
He has a different worldview. He's made his money on old way of investing.
Some of it applies, some doesn't. He would not be the first successful person
to be wildly wrong about a new thing.

~~~
epistasis
I would love hear one thing about investing before that doesn't apply now. Or
one thing that Buffet doesn't understand about bitcoin that has any economic
relevance.

Those who say he doesn't get it seem infinitely more naive and ignorant than
Buffet on this.

~~~
adamnemecek
One of the main differences is the fact that the value of a currency is
fundamentally based on who accepts it. All economic theory prior to this
is...i dont want to say outdated but needs to be reprioritized.

~~~
Cacti
Are you seriously suggesting that "currency is fundamentally based on who
accepts it" is a new idea?

~~~
adamnemecek
No?

------
_red
Goldman Sachs hasn't yet setup their own Bitcoin trading desk, but they are
building it. No doubt Buffet is trying to temper enthusiasm until their
trading platform is built. Once it is, suddenly he will "Understand it".

------
adamnemecek
Warren Buffet has previously vowed not to invest in tech b/c he said he
doesn't understand it. I think it changed in the last ~5 years. But I still
don't think that he "understands" tech.

The Beanie Babies comparison is straight up stupid. I can go to Africa right
now and I can imagine that even some of the remoter parts will be aware of
bitcoin.

~~~
bcherny
> I can go to Africa right now and I can imagine that even some of the remoter
> parts will be aware of bitcoin.

The Bay Area, ladies and gentlemen.

In all seriousness, I doubt people in most of the world have heard of either.

~~~
BoorishBears
As a person from (West) Africa, I can tell you they've not only heard of
Bitcoin but they're mining it, even in villages.

~~~
pttrpttrwttr
Pakistani here, you really expect us to believe that in countries without
reliable electricity in rural areas, nevermind reliable broadband internet
access, and 40% literacy rates people who, looking at the average GDPs of
countries in the region couldn't possibly afford the necessary computing power
are mining Bitcoin?

~~~
BoorishBears
How hard is it to imagine someone doing this:

[http://www.cnn.com/2017/12/18/africa/inside-life-
cryptocurre...](http://www.cnn.com/2017/12/18/africa/inside-life-
cryptocurrency-miner-kenya-africa/index.html)

Could move to a rural location setup a 3g hotspot (remembering in these
countries rural 3g is becoming common is actually fairly cheap) and run
generators as backups?

Here's your country:

[https://www.youtube.com/watch?v=ozBtOtDK4jY](https://www.youtube.com/watch?v=ozBtOtDK4jY)

Does anything shown really look that outlandish to do in a rural area with a
little more than a backup generator?

Mining is taking off in 3rd world countries too.

