What old rich guys don’t understand about #Bitcoin — Buffett, Munger & Gates are wrong!
I don’t want this to come across the wrong way, as I have utmost respect for those that have utilized capitalism and their skills, smarts and effort to take advantage of the opportunity this world (especially this country) presents them to make a fortune and use it to change people’s lives like these 3 men have. And I will almost certainly never be as wealthy or will have made as big a mark on society or the economic well being of my own family’s future generations as these men have for theirs. And of course they are smart, worth listening to on many topics, and are literally living legends. But to quote another great man in regards to their thoughts on the value of Bitcoin:
“YOU’RE OUT OF YOUR ELEMENT DONNIE!!!” ~ Walter Sobchak
It is understandable that at least two of these guys see Bitcoin as “rat poison squared,” “just dementia,” or “a mirage” (for those of you who don’t know what the hell I am talking about, see CNBC or CNN Money). They are from a foregone age, where money literally grew on trees, the internet was “a fad” and they did their (amazingly successful) investment calculations on looseleaf using a pencil and abacus. When they were just boys, the cool kid on their block’s dad was the first one to hear about a guy who might have had a cousin who saw a guy driving a CAR once. When it comes to the FUTURE of EVERYTHING, they are literally dinosaurs (and have been for a while, see Buffett on Google & Amazon).
I’m not sure exactly what Gates’s problem is, as clearly he gets the value of technology and isn’t THAT old. He admits the value of blockchain, actually, but doesn’t see the value of Bitcoin, per se, or cryptocurrencies in general. He agrees, with the others, that Bitcoin is a waste of time as an “investment” and thinks it probably goes to $0 at some point. It appears his decades being wealthy and exercising personal dominion over the Microsoft empire has clouded his judgment in this regard. I don’t think it is possible for him at this point to properly value something so decentralized — “Bitcoin” is something that no one owns or even can own.
Essentially, the argument these guys are making is two-fold: 1) there is no value to a “Bitcoin,” even if there is some value in blockchain, distributed ledgers or the ability to transact globally via the internet, as owning a #Bitcoin doesn’t produce any income or entitle you to the ownership of anything besides that Bitcoin (i.e., it is an unproductive asset, like the gold Buffett also disfavors as an investment), and 2) since Bitcoin is an unproductive asset, its value is only what the next guy will pay you for it (i.e., it is pure speculation).
What is “Bitcoin,” really?
Bitcoin” is not what these guys think it is. They think Bitcoin is the thing that you can buy on Coinbase — scratch that — Voyager (coming late 2018) for some dollar amount, keep in an online wallet and then do one of a few things with — use it to buy something online (presumably they think DRUGS or SEX, mostly), hold it and at some point convert it back to USD for a profit or loss, or trade it for other cryptocurrencies or fiat currencies on one of the hundreds of worldwide exchanges.
So in essence, they define Bitcoin as:
1) an online currency that can be used to buy things
2) a speculative investment (and they think a terrible one, at that)
3) an online currency that can be used as a means of exchange to turn USD into other crypto or non-USD fiat currency (currencies from other countries / regions, like the Euro, Yen, Yuan, etc.)
That list is actually a good representation of what someone is capable of doing with their bitCOINS, actually, but it isn’t what “Bitcoin” is. Bitcoin IS all of those things, AND Bitcoin is:
4) the distributed ledger that underlies it
5) the ability to store and/or transfer your wealth independent of any third party intermediary like a bank, brokerage account, etc.
6) the decentralized network of computers and miners that support the network
7) the collective belief that there is a NEED for something like Bitcoin, because of the utterly INSANE way the gov’ts of the world print money and get into debt, and the often scary instability of banks and global politics
Why is Bitcoin worth anything?
Buffet is wrong — Bitcoin is NOT an unproductive asset. It is just difficult for him to figure out WHO it is productive for and why that translates to an ever-increasing Bitcoin price, as he’s used to buying things like companies that are earning profits and paying them out to their investors or real estate that is rented out for profit. These things are assets that generate income for those that own them. People that own shares in a company legally own the company itself, and if you can spot one that has a great idea, good management and a solid financial footing (like Buffett often does), you buy a stake in that company and if it is successful, you are paid dividends on your investment. That is NOT how Bitcoin works.
Companies and Real Estate are centralized. Bitcoin is decentralized. Companies and Real Estate are owned by people. “Bitcoin” is owned by no one (even though bitCOINS are) and everyone on the network at the same time. Companies and Real Estate produce value for their owners. Bitcoin produces value for those that understand, believe in and invest into the continued growth of the concept and the network over time in various ways (buying Bitcoin, mining Bitcoin, transacting in Bitcoin, accepting Bitcoin for goods & services, building businesses around Bitcoin, spreading the word about Bitcoin, etc.).
Let me explain…
There is almost ZERO doubt that Buffet would admit that there is value in a global internet-based means of exchange, especially one that actually charges fees for that service and automatically collects them like Bitcoin does! If you asked him to value something like that, he would likely want to know 1) how big the network was and whether it was growing, 2) how many transactions a month it was doing now, if it could scale and how fast, 3) what the fees were per transaction and total fees it was generating now, and 4) how much it would cost to maintain over time. And I bet if he had those numbers, and if the Bitcoin network itself was something he could buy, he probably would.
But he understands, correctly in fact, that buying a Bitcoin is not buying a share of the network. It is NOT like buying a stock or real estate. When you buy a Bitcoin, you are getting nothing for it in exchange besides the ability to do one of the first 3 things listed above with it. And you are actually paying a fee to the “network” for the right to use that Bitcoin.
Who gets the fees you ask? The “network” gets it. There isn’t some company called “Bitcoin” out there that gets the fee, that’s for sure.
Who is “the network?” The network is the owners of the millions of computers “mining” Bitcoin.
What is “mining” Bitcoin? Mining Bitcoin is the act of dedicating computing power (“hashing” power) to solving a cryptographic algorithm put forth by the Bitcoin protocol, which computing power also supports the maintenance of the distributed ledger of transaction records that is Bitcoin.
Why do people “mine” Bitcoin? People mine Bitcoin both to get a share of those fees that people pay to use Bitcoin, and because when their computer (or a pool of computers to which they are dedicating their computer’s hashing power) successfully solves Bitcoin’s cryptographic algorithm, the network awards them Bitcoin. And the more Bitcoin goes up in price, the more valuable the award for successfully mining Bitcoin.
At $8,500 a Bitcoin, why isn’t every computer in the world just mining Bitcoin all day? Because the more computing power is dedicated to Bitcoin mining, the more difficult the cryptographic algorithm automatically becomes to solve, so the less valuable any particular computer’s power becomes. This is called mining “difficulty” and if you have anything but a computer designed specifically to mine Bitcoin at this point, either don’t bother mining Bitcoin (as the electricity you spend to run that computer will be worth more than the Bitcoin you get from it) or invent a time-machine and go back to 2010 to mine Bitcoin when barely anyone was doing it (but then again, Bitcoin was worth much less in 2010, so even though you would get way more of them, you still needed a great computer to make real money at 2010 prices).
So it’s worth something because why again?…
Given you managed to follow of the above, and I’m not even sure I do sometimes, Bitcoin is worth something (and will continue to be worth more and more over time) because:
1) Bitcoin as a decentralized network is a productive asset for those that dedicate their computing power to mining it, as they earn bitcoins and transaction fees for supporting the blockchain. Buffet could think of these “miners” as the workers in a company owned by its employees — just because he couldn’t buy that company without becoming an employee doesn’t mean he wouldn’t if he could or that the value of that company wouldn’t go up over time…
2) Bitcoin as a means of exchange is valuable because it is a quick, secure, provable method of either paying for goods & services or exchanging value for other assets. Buffet understands that there’s value here, but also that he just can’t BUY it by buying a Bitcoin, and he doesn’t understand why Bitcoin as a means of exchange couldn’t be just as effective if Bitcoin were worth $1.00 USD forever.
3) Bitcoin as a distributed ledger (dispersed database of transactions) is valuable because it doesn’t depend on some bank, which can go all Lehman, or some government, which can go all Venezuela, to support it. Buffett sees the value here as well, I’m sure, but he both has more faith in gov’ts and banks than most others and doesn’t see any necessary tie between the size or effectiveness of this distributed ledger and the value of one Bitcoin.
But there are three key missing pieces to the puzzle that explain why the above 3 inherently valuable attributes of Bitcoin translate into an ever-increasing Bitcoin price:
4) SCARCITY — there are only just over 17,000,000 Bitcoin out there so far, and will only EVER be 21,000,000 Bitcoin in existence (the amount of Bitcoin rewarded to the network gets cut in half every few years, and the bitcoin reward for mining stops altogether in 2140 or so, when the network will have to support the miners with just transaction fees). If Bitcoin catches on even more than it has already, it isn’t as though some company can just create more. Or like how when every bank in the country goes into chaos it isn’t like how the US Gov’t can just “print” money through quantitative easing to keep them afloat. And the more people use it or mine it for all the benefits it brings, this scarcity will lead to price increases. Compound this increase with the inevitable inflation coming to those countries that keep printing fiat currency and going deeper into debt, and this price increase gets even larger.
5) Price increase / network improvement feedback loop. Imagine the employee-owned company alluded to in point 1. The founding employees of this company called Bitcoin were not just whoever Satoshi Nakamoto is (the guy/girl/people/aliens/shadow gov’t that created Bitcoin), but were instead actually Satoshi and ALL of the early miners. They found out about Bitcoin, started mining them despite their not yet having a proven exchange value, began building out this amazing decentralized network with their mining, and ultimately mined a TON of coins that were initially worth nothing in exchange for doing this (since mining difficulty was so low). These miners, the initial coins and the fledgeling network were the bitcoin “startup.”
Next, someone, likely the same people doing the early mining, found people willing to offer a few dollars or a good or service in exchange for these early Bitcoins because these other people saw the value having such a thing as cryptocurrency could provide (famously, the first ever believed to be Bitcoin purchase of a good was a pizza for which someone accepted 30,000 Bitcoins as payment; appx $295 million at today’s price). And the blind dedication of the early miners building the network for nothing had proven the concept to them.
Next, some other people saw that there were people willing to accept Bitcoin for goods & services, so they said “let’s make an exchange” whereby someone who wants Bitcoin but can’t or won’t mine them and doesn’t sell anything that people are willing to buy using them can just exchange fiat currency for them. This opened the market of Bitcoin up to more people, added buyers and potential users of Bitcoin, and essentially set an established exchange value for them over time.
Finally, now that there was an established exchange value, more people could be persuaded to mine coins, making the network (the company of employees) even more capable. And with a more capable network, people were willing to pay more for these coins as a means of exchange. And when they paid more for Bitcoin, the reward for mining went up, so more miners joined the network, making the difficulty go up but adding even more capability to the network. Driving more people to buy Bitcoins and use them. You get the picture here…
Essentially, anyone that hears about Bitcoin and “buys into” the need for / benefit of the Bitcoin network and wants “in” either comes in and buys some Bitcoin to use or starts mining them or accepting them as payment. And this creates the price increase / network improvement feedback loop mentioned in the previous paragraphs. Once you send money to China via Bitcoin (especially if you’ve ever tried that at a bank with a wire) or send someone in Europe $50 in Bitcoin for their Birthday, you are hooked. We aren’t going back to the days of banks and wires and the risk of bank failures and fiat currency inflationary explosion (no more Zimbabwean or Venezuelan “trillionaires” born through idiotic gov’t policy). Once you buy and use Bitcoin, the fact that it is the future becomes utterly apparent. And you #HODL.
6) Now that it’s caught on, Bitcoin perpetuates Bitcoin perpetuates Bitcoin. The Bitcoin cat is out of the bag, and can’t be put back in. Bitcoin is pandora’s box. It’s value as a concept is amazing. A store of value that is decentralized, democratized, international, secure, semi-private, quickly transferable, very divisible, scarce, etc., etc., etc. It is almost the ONLY way which you can buy many other crypto assets, many of which now serve totally different purposes to Bitcoin and are more like traditional “productive” assets (some are Real Estate ownership coins or Securities coins, giving you ownership in a company or buildings just the way Warren Buffett likes!!).
Bitcoin is convertible into every major worldwide currency, so just like how you can get by speaking just English in much of the world at this point, you can pay with Bitcoin (or convert to local currency) almost anywhere. This isn’t THAT big a deal if you own USD or Euros (yet), but tell that to people in regions with more obscure currencies! More companies are accepting Bitcoin, and the more accept it, the more will accept it. The big banks on Wall Street are trading it, CNBC is constantly talking about it, and tens of thousands of companies with hundreds of thousands of people have been spun up to leverage its success and explore other implementations of blockchain and distributed ledgers.
Bitcoin’s and crypto’s meteoric rise in 2018 has brought it into the collective consciousness’s attention, and it ain’t leaving anytime soon…
I don’t know what price it will hit, but I know it will keep going up. The only thing that could possibly stop Bitcoin at this point would be another cryptocurrency that serves the same purpose but better (perhaps some of the ones that have spun off of Bitcoin, like Bitcoin Cash or Bitcoin Gold). And there is a strong argument to be made that this is the case when you look at some of the other projects out there. Some other “currency” coins are cheaper to use, easier to mine, built on faster networks or have enhanced privacy features.
But my opinion is that since Bitcoin is the “gold standard” of all cryptos, is so embedded in the vernacular and still remains the main asset in which all other cryptos are quoted and traded, it has nowhere to go but up… There is plenty of room for Bitcoin to go to $1,000,000 a coin even if there are multiple other coins that surpass it… After all, there is about $75 trillion in currency in circulation, which equates to a $4.4 million current bitcoin price if it were to become ubiquitous. And global real estate is worth about $217 trillion, global stocks are worth about $76 trillion and gold is worth about $7.5 trillion…
Mr. Buffett, Mr. Munger and Mr. Gates, the Bitcoin community will collectively and in a decentralized manner accept your apology (probably posthumously for a few of you) when proven right over time. It isn’t your fault you don’t get it; you’re wayyyy out of your element. Just be happy that by the time your centralized investment concepts are officially extinct, you’ll likely have gone the way of the dinosaurs as well.
(The opinions expressed in this article are those of the Author and not those of any entity or affiliate with which he is associated)