Why is bitcoin worthless to Warren Buffett?
It’s nothing personal. Throughout his career, Mr. Buffett - perhaps the most storied investor in history - has espoused one and only one thing: value.
Specifically, the difference between intrinsic value and market value: the greater it is, the lower the risk and the better the investment (risk ain't about Greek alphabets).
Here’s where it gets interesting: he defines ‘intrinsic value’ simply as ‘the discounted value of the cash that can be taken out of a business during its remaining life’ (p.22).
To put it plainly, Mr. Buffett finds it easier to estimate earnings, dividends and coupons than prices.
Based on the definition, we can also see two things:
- Whatever ‘bitcoin’ is, he probably doesn’t see it as a ‘business’.
- Even if he did, bitcoin does not generate future cash flows in and of its own, and by this fact alone, he likely considers it to having no intrinsic value and hence is out of his scope of investments
Mr. Buffett sticks to his “circle of competence” (basically having a deep understanding in certain areas) for investments – and for Berkshire, even though the circle is very large, it is simply not everything available for investment in the universe. Bitcoin is simply out of the circle.
Mr. Buffett is also well known for not favoring investments in technology companies because of the difficulty and uncertainty in forecasting their future cash flows (if any). (Note: he did in recent years begin investing in Apple – but only because he sees it as a good ‘consumer product company that uses technology’, which he understands, and not a ‘technology company’).
So a fundamentals-driven investor should not overly disheartened by Mr. Buffett or Mr. Munger’s discouraging comments about bitcoin being 'worthless artificial gold' (note: they don't invest in the magical metal either). They assessed them and determined they were not good investments, for the criteria that they use to assess investments.
However, we if take a broader approach to ‘value’, eg. "generally having a real-world use case" (usefulness/utility); or perhaps more specific to a technology product, “something people want”, bitcoin potential value suddenly becomes very... intriguing. We will discuss bitcoin’s value proposition in a subsequent article.
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