Warren Buffet’s and Marc Andreesen’s Misplaced Trust

I had a fascinating twitter exchange with Marc Andreesen last week that caused me to think hard about Bitcoin as a proxy for trust. Marc, the tech titan in the red corner, has been engaged in a reporter’s dream match, virtually jabbing back and forth with Warren Buffet, he of value investing fame, about the value of Bitcoin. Buffet thinks that the thought of Bitcoin having intrinsic value is “a joke” and Marc thinks that Bitcoin is the second coming of Jesus, or at least TCP/IP. Ironically, I actually think they agree on a core principle that “trust” is the foundation of any currency. They simply disagree on who, or what, we should trust. I, respectfully, disagree with both.

The core of Buffet’s articulated position is that Bitcoin is like a check or Western Union. It is a mere protocol or transport mechanism for currency transfer. Says Buffet,

“Stay away. Bitcoin is a mirage. It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? You can transmit money by money orders. People do it. I hope Bitcoin becomes a better way of doing it, but you can replicate it a bunch of different ways and it will be. The idea that it has some huge intrinsic value is just a joke in my view.”

However, I think the moorings of Buffet’s position are quite different than his articulated analysis. Buffet basically believes that currencies are minted by governments and not blockchains. That is why he calls it “a mirage” and suggests it has no INTRINSIC value. Buffet viscerally believes that Bitcoin has no backing from a trusted authority like the US government. The Dollar, according to Buffet, has INTRINSIC value because it is backed by the US Government, a “trusted” backer. Buffet, as a member of the financial establishment, has a deep belief in, and trust of, institutions. His trust of those institutions causes him to look at currency as a representation of that trust and not just the paper it is printed on. Certainly, there is some truth to this point of view since we know that when we lose trust in a given government, its currency loses value precipitously.

However, in reality, that “trust” is just a covenant between people to accept that currency as tender for assets. If I agree to accept it, then it is currency. It is, in my opinion, a “mirage” that we all subscribe to. Additionally, and reflective of that mirage and covenant, is that fiat currency has a single point of failure. As happened in Argentina during the last decade, when that trust breaks, the currency falls quickly. To borrow from Nassim Taleb, that makes the US government super fragile and the Dollar (especially as the world’s reserve currency) decidedly not anti-fragile. 2008 reduced trust in the US Government and Treasury and, hence, reduced trust in the Dollar. Without that trust, the Dollar is just the “check” that Buffet describes.

Andreesen on the other hand, like many great technologists in Silicon Valley, has a deep, almost religious, trust of technology and, I would argue (without putting words in his mouth), a distrust of institutions. As Marc said about Buffet in a Forbes interview:

“This is a standard trope of technology criticism by people who don’t understand technology…Yes, sure, it’s great technology, but it won’t be useful or valuable in the way that those crazy nerds think it will be useful or valuable.’ I’ve heard it my whole life applied to every new important technology. It’s fake sophistication — it sounds nuanced but it’s not.”

When Andreessen looks at the blockchain, he sees a distributed system that does not have one node that is a single point of failure. Therefore, that blockchain does not need to trust anyone nor any institution. Consequently, the reason Bitcoin’s architecture is valuable is because you do NOT have to trust anyone nor any institution. Hence, Andreessen trusts it, the technology.

Furthermore, the value of Bitcoin according to Marc is based on the fact that there are a limited number of places on the blockchain, therefore it is scarce and since it enables transactions (I accept it as tender) it is effectively currency. Here, the distributed blockchain replaces the need for trust. If we trust the technology, I neither need to trust you nor the institutions that back currency. So, if you, a consumer, want to possess a currency that does not require trust, such as Bitcoin, you must have a seat on the blockchain so that “someone else” is watching your behaviour and replaces the trust you would otherwise need. Marc articulated our mutual critique of Buffet’s trust in institutions and his own “non-trusting” position better than I ever could:

2/3 Bitcoin is an inherently non-trusting environment. Hence distributed ledger via blockchain. In theory, $USD backed by “trust” in US Gov

— mikeeisenberg (@mikeeisenberg) March 28, 2014

@mikeeisenberg Yes, I agree with that. I think unified view is peer-to-peer trust vs centralized institutional or broker-mediated trust.

— Marc Andreessen (@pmarca) March 28, 2014

And this tweet from Jake Cohen sums it up:

My quibble with Marc is on two grounds: First, I think that trust systems are more lasting than non-trust systems. Second, as I tweeted in response, I think the blockchain becomes an infrastructural single point of failure much like the US government or a big bank that is “too big to fail.” They all survive only because of trust in the system. When the trust fails, the entire system fails. With Bitcoin, the blockchain does not have a single technological point of failure. The distributed technology means that individual nodes can fail and the blockchain lives. However, the blockchain itself is built on the total trust of its community, or the non-trust of the community. It either all works or, it all fails, much like a bank or a fiat currency.

So, you have Warren Buffet who trusts the US government or other governments and banks to support the intrinsic value of currencies. Marc Andreessen existentially distrusts institutions and prefers to replace it with distributed technology that does not require trust in anything except for total trust in the technology platform.

Personally, I think the history of currency, money and financial transactions, points in a third direction of distributed trust networks, a harbinger of which emerged in Ireland in the 70s and Austria in the 30s. More on that in my next post.

Thanks to Eran Shir and Eden Shochat for looking at drafts of this post. See my previous post on Israel’s Bitcoin Opportunity.