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Dear Mr Buffet: A Bitcoin is Not a Farm, and That's Okay - Outside View by Prasheel Vartak

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Dear Mr Buffet: A Bitcoin is Not a Farm, and That's Okay
May 11, 2018

Thousands of eager investors descended on the city of Omaha, Nebraska to hear from the Oracle of Omaha himself - Warren Buffet. Millions watched online.

And they all hear dear Mr Buffett bash Bitcoin to bits.

Berkshire Hatchway's annual general meetings are eagerly awaited all year round. These meetings always have something in store for everyone tuning in. If you haven't seen the video, read what our analysts have been saying about it - Richa, a leader in the small cap space; Ankit also known as the Insider; and Taha - a follower of Graham, Buffet's guru, have all shared their takeaways from the meeting.

Among a range of topics discussed, there was invariably a question on bitcoin, and this is what I want to talk about today.

When asked why he thinks bitcoin is a bubble, Buffet dismissed it by saying that bitcoin and cryptocurrencies are speculative and are not productive.

Warren Buffet doesn't like Bitcoin because... 'it's not a value producing asset'.

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But so what? Neither is cash or gold. The only reason the US dollar has value is because people perceive it as having value. Otherwise it's just a flimsy piece of paper.

Buffet then went on to equating cryptos to a cheque:

  • 'You know, the cheque is a wonderful idea. Just imagine how the world would be without being able to write cheque or have wire transfer of funds. But it doesn't make the cheque intrinsically itself worth a lot of money.'

However, Mr. Buffett is wrong

Comparing bitcoin with a cheque makes no sense because bitcoin does not represent money, it IS money.

If someone sent me a cheque for Rs 10,000, that cheque is just a promise to give me rupees. When someone sends me bitcoin, it is instantly spendable in its current form. I need not 'cash a cheque' because bitcoin is already money.

Do not think of bitcoin as a means to transfer rupees, it holds value by itself.

Buffet then goes on to show the differences between purchasing a farm and bitcoin.

  • 'If you buy a farm, apartment or a business and look to the asset itself to determine whether you've done something, what the farm produces, what the business earns and so on... and it's a perfectly satisfactory investment. You look at the investment itself to deliver the return to you'

    'Now if you buy something like bitcoin ... you don't have anyone producing, you're just hoping the next guy pays more. If you ban trading in farms, you could still buy farms and have a perfectly decent investment ... But if you ban trading in tulips, or bitcoin ... people would say 'why in the world would I buy it.' You aren't investing when you do that. You're speculating.'

While Buffett is right to say bitcoin in itself has no intrinsic material value, and derives it only from demand and supply, it is in that sense exactly like any currency.

You can't plant a rupee or a dollar, watch it grow and expect dividends out of it.

You, however, can buy a stock because you think other people will be willing to pay more for it.

Almost everyone buys stocks for one reason which is: because they think it will be worth more later.

Having said that, much of the cryptocurrency craze is built up on speculation, and on that singular front, Mr Buffett is absolutely right. Most cryptos thrive on speculation and have little to nothing to show for a 'product'.

I've been saying the same too - I believe 95% of all cryptos are bound to end up as failures.

However, the point that makes Buffett right, is also where he goes wrong. You see, the mistake is to assume speculation as the complete extent of the technology.

Cryptos, along with the blockchain can offer a variety of solutions for businesses of all sizes, ranging from trustless payment gateways, to immutable record keeping.

This obviously has real world applications and goes way beyond mere speculation.

Too often traditional investors forget Bitcoin is actually a technology infrastructure.

Bitcoin has fueled huge amounts of innovation over the last few years. The revolutionary blockchain technology has shown that there are alternatives to many industries and assets.

As we all know, Buffet only invests in things he understands. And, by his own admission, he doesn't understand technology. Buffet admitted that he missed investing in Google and Amazon, which proved to be costly mistakes.

Talking about missing out on Google, Buffett and his deputy Charlie Munger admitted their age (87 and 94, respectively) mean some tech investments may pass them by:

'We were not ideally located to be high-tech wizards,' Munger said, adding 'I have been to Google headquarters. It looks to me like a kindergarten.'

Buffet was late to the Apple party as well, investing a significant chunk of money much later in the tech giant's life cycle.

Many generations of investors have learnt a great deal from Buffet's strategy of investing, so it is difficult to suggest that he is wrong about something.

However, seeing how he doesn't really understand the technology, Buffett's views on cryptos should be taken with a pinch of salt.

Pay attention to the world around you.

Governments and companies are jumping in on the blockchain and crypto bandwagon. Goldman Sachs - in which Berkshire Hathaway holds a substantial stake - is preparing a crypto trading desk.

The New York Stock Exchange is preparing to launch a cryptocurrency exchange.

The financial world is constantly evolving. Even if you aren't ready to buy, it is absolutely worth paying attention to. Now is the time to learn, you wouldn't want to be left behind.

Warm regards,
Prasheel Vartak
Prasheel Vartak, CBP (Certified Bitcoin Professional)
Editor, Crypto Confidential

Prasheel Vartak is a Certified Bitcoin Professional (CBP), and works with global Crypto Guru Tama Churchouse to bring to his readers, views, and opinions from the cryptocurrency and blockchain space. Prasheel is the editor of the premium monthly newsletter, Crypto Confidential and has authored a comprehensive learning course on Bitcoin, Blockchain and other cryptocurrencies, viewed from an Indian perspective.

© 2018 Common Sense Living Private Limited

Disclaimer:

There are no recommendations made through this article. This is not an offer to sell or solicitation to buy any crypto currencies. All data/ information contained herein is purely educative and informative Please note that you should make yourself aware that crypto currencies are not regulated in India and any action taken, investment(s) made or decisions taken/or not taken based on the information provided herein is solely at your risk and Common Sense Living Private Limited and/or its affiliate(s), associates, employees or directors will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. This is not directed for access or use by anyone in a country where such use or access is unlawful or which may subject Common Sense or its affiliates to any registration or licensing requirement.

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1 Responses to "Dear Mr Buffet: A Bitcoin is Not a Farm, and That's Okay"

Pradeep Kumar Nair

May 16, 2018

Prasheel,

to your point to look at the world around us, should I really look at Goldman Sachs opening a crypto trading desk, because it sounds like good strategy for them or even sound bites, or should i check if normal people across strata of society in different parts of the world reaction to crypto?
My tilt is towards the latter.... please do not advise your readers to see the world around them with the wrong examples...

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