I never knew what to think about Bitcoin when it first came onto my radar. Unlike me, however, Warren Buffett was very clear on his thoughts:
"If you told me you owned 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?"
His longtime partner, Charlie Munger, makes him look like some kind of Bitcoin fanatic in comparison:
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"Well, I have a slightly different way of looking at it. In my life, I try and avoid things that are stupid and evil and make me look bad in comparison with somebody else. Bitcoin does all three."
They first started talking about Bitcoin in early 2018. Since then, Bitcoin has increased 400%, while Berkshire Hathaway, their investment company, has gone up 75%. So how can Bitcoin be so bad if it's doing so well? And why do these two, who are regarded as the epitome of financial wisdom, despise Bitcoin? Could they, dare I say it, be wrong?
I spent the past month trying to answer this question. I did not expect to find what I found.
The Apex Property or Worthless Asset?
Bitcoin is hailed by some as the apex property of the human race.
"There is no property invented in the history of mankind that is better than Bitcoin," some proponents argue.
Others, like Warren Buffett and Charlie Munger, see no intrinsic value in this asset.
"There's no intrinsic value to this asset," Buffett says.
While Bitcoin enthusiasts believe it's a superior asset that's "going up forever," detractors believe it's in the process of going to zero.
Financial experts are sharply divided. Some predict that by 2025, Bitcoin will reach north of $300,000, scaling from a little more than a trillion dollars today to $25 trillion in 2030. Others see it as a speculative bubble, a pure "greater fool" theory.
"I would short it if there was an easy way to do it," says Buffett.
So, what is Bitcoin? Is it a significant tool for freedom, akin to the birth of the internet, or is it worthless artificial gold?
Understanding the Problem Bitcoin Aims to Solve
To understand Bitcoin, one must understand the problem it aims to address.
Imagine a 30-year-old living in the U.S. in 2020 when the whole country gets shut down due to the pandemic. Let's call him Ryan. Ryan has been responsible his whole life. He's worked hard since he was 18—no partying, no traveling, definitely no frivolous spending. He saved up $100,000 to buy a house and take care of his family. When the pandemic comes, he decides to keep being responsible and locks his money away until times are less volatile—a decision traditionally considered prudent.
Three years later, he returns to his savings and finds he can't buy the house. Prices are 37% more expensive. To fill up his car, it's double the price. That $100,000 he spent 12 years working so hard for is now worth $70,000 in real terms. And that's just over three years. This is what he gets for working hard nine to five, saving, no gambling, no speculation. He gets hit with what's known in the finance community as the "silent tax."
The silent tax isn't just in the U.S.; in most countries, it's much worse. If we use the same example but place Ryan in Argentina with pesos, he would have $15,000 left today. This isn't a made-up story in some inverse reality; it's a harsh truth.
Traditional currency has major flaws. If only there were another way.
The Historical Erosion of Currency Value
If you go back in history, you'll notice that this issue isn't a modern-day problem; it's been ongoing for more than 100 years with more than 100 currencies. The dollar is losing 7 to 10% of its value a year for 100 years. That means over the course of a century, the dollar loses 99% of its value.
"My house in Miami Beach was purchased for $100,000 in 1930. I bought it for $14 million in 2012. Today, it's worth much more. From $100,000 to $50 million in less than 100 years—that's not the house getting more valuable; that's the currency getting less valuable," notes an investor.
If you took any amount of money—say, $100 million in the year 1900—and invested it in any currency in the world, you would have lost 100% of your money in every currency except for the dollar or maybe the pound. Every currency collapsed. The winner of every war in the 20th century was the United States, and even its currency lost 99.5% of its value. Everybody else, you lose everything.
The problem is, if you hold the wrong currency, you get burned. The issue is that every single currency is the wrong currency; it's only a matter of how badly you get burned. The reason why is because all of them have one thing in common: they are controlled by central power—a power which purposely, legally, and silently dilutes the people's currency. But what if there were a new currency that didn't?
Enter Bitcoin: A Decentralized Solution
The idea of currency is fundamentally a good one. I'm a fisherman, and you're a lumberjack. I fish; I have some leftover, so I give some fish to you, and in return, you give me some logs. Hang on, I don't need any logs. Well, use this piece of paper instead to store the value so you can use it on something that you do need. That piece of paper is what we call currency or a store of value.
The problem comes not with the concept of currency but with the people who control that currency. This institution is known as the central bank or, in the USA, the Federal Reserve. Like an uncle who can't shake his gambling habit, the central bank has a nasty habit of its own: printing money.
"The Fed was printing too much money. The Federal Reserve is pumping money in. The Federal Reserve just printed $300 billion in one week. That has gone up $800 billion. The government printed a zillion more money than it had. Unlimited money. The Federal Reserve and the central banks in Japan, England, and Europe are printing staggering amounts of money. Inflation is going to last for years."
Unfortunately, when you print more money into the system, it devalues the current money that's already in the system. So everyone's cash that they've saved in the bank effectively gets devalued by how much is printed. Then you're left with the savers who become losers and the non-savers, well, they stay broke too.
Either this is just the way things have been, are now, and will always be, and we must just deal with it, or we can find a solution.
Someone who knows this problem very well is a person who goes by the name of Satoshi Nakamoto. Whether he had been burned by inflation in the past, whether he had lost faith in the traditional financial system, or whether he was just bored looking for an easy way to become a millionaire, we don't know. We're not even sure if Satoshi was a he or a single individual. The only thing we do know is that Satoshi was the one who invented Bitcoin.
In January 2009, this mysterious online currency was created. It's designed in a way to solve all of the issues of modern currencies.
It's Not Controlled by Anyone: Its power is decentralized across millions of computers. If one computer or even a thousand get into the wrong hands, you still have a million others to keep the currency safe.
It Has a Maximum Supply of 21 Million Coins: This way, the currency cannot be inflated. This means people like Ryan aren't left penniless simply by doing nothing.
Easy Transferability: Unlike gold, the currency can be transferred at the click of a button, which is a very powerful concept. Let's say you wanted to transfer your wealth to a new country—your current country has turned corrupt, too much crime, controlling government, whatever. No problem—a few clicks, and you send your money anywhere, any place, any time. Or, if this is too hard, remember your private key password, and your entire net worth can literally be stored in your head.
It sounds like a pretty good invention. So that begs the question: why do these two financial sages hate it?
Warren Buffett's Investment Philosophy
To understand this, we need to enter into the mind of Warren Buffett. I've studied Warren Buffett ever since I was a nerdy 18-year-old just heading into university, so I know exactly why Buffett hates Bitcoin.
In January 2011, Buffett was preparing to make a big investment. He'd spotted a company that fit his investing philosophy and could make him a lot of money. His philosophy is to buy stocks for a reasonable price where the cash flow quickly pays you back the price and then even more for years to come. This philosophy has consistently worked for him throughout the years.
He decided to make his move and bought 55 million shares of IBM. This stock had just made $15 billion in income and had a market cap of $200 billion. If all went well, this company should pay his money back quickly, and then he'd have a free cash flow machine. This investment was perfect for Warren Buffett because he doesn't like to do what's known as speculating—buying something that's not producing much in the hopes that one day it will. Buffett considers this too risky, and his worst nightmare is to lose his shareholders' money, even more than losing his own.
So when a new asset comes along that produces literally nothing, is a currency that's not used in everyday life, and even worse, one that's purely online, Buffett doesn't even let it touch the purview of his investing framework.
Charlie Munger's Stance: More Than Skepticism
Then there's Charlie Munger. Well, let's just say he's a bit more to the point than Warren. When Charlie buys a stock, he doesn't hold back. In 1978, he saw Berkshire Hathaway and put most of his family wealth into the company. He found Costco many moons ago and went large into the stock. When Munger sees something that he likes, he takes an extreme position. But this concept works both ways.
"Sometimes I call it crypto crapo, and sometimes I call it... well, crypto [expletive]. I think it's rat poison," Munger says.
A key argument behind Munger is that he thinks Bitcoin is evil. Now, one might wonder how a currency can be evil. Unfortunately, it's not just the peaceful freedom seeker who has adopted Bitcoin; it has also become a great currency for criminals.
"This is a very, very bad thing. The country did not need a currency that's good for kidnappers and so on," Munger asserts.
Let's say someone is doing something illegal—hypothetically, a drug trafficker (full disclosure: I'm not a drug trafficker). They've just sold a million dollars' worth of drugs to a dealer. The dealer sends the money to their bank account. Wait—they don't want this money going to their bank account. Banks are highly regulated; they require identity documents, they need legal statements to approve large transactions, the account can be frozen or seized—they could get caught. No problem—send the money to their Bitcoin address instead, and they'll remain anonymous. Yes, the transactions are kept on the blockchain, but the identities? No one knows. And there you go—they've just made $1 million illegally and anonymously.
Bitcoin's greatest benefit becomes its greatest downfall. No one can control it, so no one can control the criminals.
The Dependency on Popularity
The success of Bitcoin is fundamentally different from most assets. Bitcoin's success depends on how many people want it. If no one wants to buy a bond from you, it doesn't matter; you still receive yearly coupon payments. If no one wants to buy your stock, well, the business still earns money anyway. If no one wants to buy your farm, it keeps producing crops. But if no one wants to buy your Bitcoin, it's worthless. However, on the flip side, if everyone wants it, it becomes very valuable.
This is why the people that own it are surprisingly loud about owning it. They need others to adopt it so that the price goes up. And the most important people that they need on board are the institutions—the big money: BlackRock, Vanguard, hedge funds, governments. We all know China's move to holding gold instead of the U.S. dollar, but imagine if they move to Bitcoin.
Now, I hear a lot of crazy price predictions that, to be honest, I don't know where they pull these numbers from. But let's try to be realistic: if all goes well, how big could Bitcoin get? Right now, Bitcoin has a market cap of $700 billion. Another asset class that is considered a store of value is gold. Gold's market cap is $11 trillion. If Bitcoin were to get as big as gold, it could 15x. Or you could argue it's better than gold; maybe it should be double gold's market value—that would be a 30x in price. But that's very bullish. Gold has been used for storing value for hundreds of years; Bitcoin's barely been used for 10. That's one outcome for Bitcoin.
The Potential Downside: Flaws and Risks
The other outcome—the one you probably don't want to hear—has been the fate that many other cryptos have already experienced. Bitcoin is by no means the perfect form of currency.
In May 2021, Elon Musk's Tesla stopped accepting Bitcoin as a form of payment. Why? I thought Bitcoin was the currency of freedom, and Elon Musk is almost the flag carrier of this. He sold Bitcoin not because it's decentralized and free, but because of its energy use. A Harvard Business Review calculated that Bitcoin consumes around 110 terawatt-hours per year—that's 0.55% of global electricity production, or roughly equivalent to countries like Malaysia or Sweden's energy draw. To put that bluntly, that's a lot, and it's a significant burden on the environment.
Add in slow transactions, annoying fees, and the volatility of the free market, and you have a currency that is pretty painful to use. Just go ask El Salvador. El Salvador adopted Bitcoin as their second national currency in September 2021, going to great lengths to see it become ubiquitous. But in late 2023, it's very rare for businesses and people to use the crypto. It's too slow, and it's too volatile. Imagine just holding your savings, and a few months later, it's gone down 20%, and then the next month, it's up 20%. That's your financial life's work. You'd have to be Marcus Aurelius to not get emotionally affected by that.
The sad reality about Bitcoin is it has a lot of flaws as a currency, and all of these flaws may cause it—to go to zero.
"It's stupid because it's very likely to go to zero. It's worthless; it's no good; it's crazy; it'll do nothing but harm. It's antisocial; it's just disgusting. It's like somebody else is trading turds, and you decide, 'I can't be left out.' It will come to a bad ending," Munger says.
The Battle for Bitcoin's Future
There's an interesting battle that's going on in the finance world right now. It's kind of like the battle between the left and the right. The left is talking about all of the possibilities and benefits if we try a new system, and the right is talking about everything that could go wrong. The new financial influencers are saying it's great; the old are saying it's rat poison. Except, unlike politics, with Bitcoin, I don't think there's going to be an outcome that's in between the two parties.
This coin—something that you can't touch, hold, or control—could fix the age-old problem of broken currencies, or it could be the coin that ironically hurts the very people that it intends to save. I'm not going to be a fence sitter. I don't agree that this coin is evil. I prefer a world with crypto than without. But the risks are very real.