Warren Buffett on Bitcoin
What do you think and what do you say when you’ve invested, or are thinking about investing, in something that cost $19,343 in December and that three weeks later costs about $11,900? This is one of those cases where procrastination helps. We’re talking about Bitcoin of course. If you managed to “keep your head when all about you are losing theirs,” to quote Rudyard Kipling, and avoided Bitcoin, you were right. It turns out you are in good company; famed mega-investor Warren Buffett shares your skepticism.
What’s the opinion of Warren Buffett on cryptocurrency? Well, let’s say he’s avoiding it like the plague. He doesn’t use complex arguments, technical analysis, or financial modeling. Instead, he states the obvious: “You can’t value bitcoin, because it’s not a value-producing asset.” And this isn’t something Buffett expressed after the bubble became clearer. In 2014, long before the $19,000 valuations, he said, “Stay away from it. It’s a mirage, basically…The idea that it has some huge intrinsic value is just a joke, in my view.” (Source: “Opinion: Heed Warren Buffett’s warning: bitcoin is pure FOMO,” MarketWatch, January 15, 2018.)
Warren Buffett’s Prediction for Bitcoin is Coming True
It’s always a gratifying to be able to say, “I told you so,” especially when you happen to have been “telling them so” since the very beginning. The subject of this guilty pleasure, and not a little schadenfreude, is Bitcoin. As useful as the underlying blockchain technology behind may be, Bitcoin’s 1,500% gain (yes, that’s no typo) in 2017 seemed a little suspect to be described as bullish. Rather, Bitcoin’s performance is better described by another word that starts with the letter B. If you guessed “bubble,” you’re on the right track and have earned yourself a cookie.
The Bitcoin crash is coming; in fact, there was something of a Bitcoin crash today. It’s been something of a crypto-massacre for the electronic currencies that nobody has really figured out how to sue, except for those needing to operate in what might be politely described as “hypo-legal.”
5 Reasons Why Bitcoin Will Crash
The first, and perhaps the most important, reason why Bitcoin will crash is the same reason why it rose so spectacularly in 2017 in the first place. Bitcoin is the type of investment that traders politely describe as “Fear of Missing Out,” or “FOMO.” Bitcoin has risen because many investors, experienced and beginners, started to fear missing out. It’s really the same phenomenon that drove the Tulip bubble in the 1630s or, more recently, the dot-com bubble of the late 1990s and the housing bubble, marked by the “fixer-upper” home renovation craze of the first half of the 2000s. (Source: Ibid.)
People fear missing out on what appears to be a lucrative and fail-safe premise: buy cheap and sell high. That’s the right attitude, as it happens. The problem is when it gets projected through a “get rich quick” perspective. The tried and true concept of the markets gets distorted. Surely, the initial investors have much to gain, but they’re a handful and the absolute exception to the norm. They get the stock–or the cryptocurrency, in the case of Bitcoin–at near zero entry cost. They have nothing to lose. But as more and more investors come in, the price goes higher, like a cat climbing a tree out of its proverbial curiosity–not unlike investors’ FOMO. Sooner or later, the cat looks down and gets scared.
The second reason why Bitcoin is crashing is related to the first. The FOMO nature of Bitcoin and the absence of a clear purpose makes this, and other cryptocurrencies, volatile and unpredictable. How else could something–anything–gain 1,500% in value over a single year? However, Bitcoin is especially vulnerable. Its value is not based on a long established and recognized physical resource like gold or silver. While some want to link cryptocurrencies to a resource, like Venezuela’s petroleum-based Petro, Bitcoin is not. It runs on a pure supply and demand mechanism. It has no factories, offices, products, or services that can be sold, thus its value depends exclusively on how much someone is willing to pay for it. Unlike traditional currencies, whose values depend on a variety of factors that can be interpreted, controlled, and even predicted (interest rates, for example, and debt levels), Bitcoin investors are the only ones who determine the value because of…well, frankly, that’s the problem.
The third reason that Bitcoin is crashing is that many decided Bitcoin was worth a ridiculous sum in actual currencies like dollars or euros in the last few months of 2017. Now, given the psychological nature of reason number one, FOMO, implies fickleness, many are getting scared after Bitcoin’s first big drop in the first week of the year. The higher you go, the harder you fall. And while bitcoin fluctuated regularly before, the latest fall has not produced a corresponding bounce. It seems all downhill now, triggering the reverse FOMO mechanism. Let’s call it “Fear of Staying In,” or “FOSI.”
The fourth reason is more of an excuse. Coinbase, the online store where people can buy bitcoins, was overwhelmed on the past few days. Then there were insider trading allegations of Bitcoin cash. (Sources: “Coinbase: Massive Buy Demand Caused Bitcoin Cash Launch Hiccups,” Coindesk, last accessed January 16, 2018; “Alleged Bitcoin Insider Trading Discovered Via Coinbase with Potential 8x Return,” Forbes, December 25, 2017.)
The Chicago Mercantile Exchange and Chicago Board Options Exchange, which also trade bitcoins, had problems as well. Perhaps these technical problems allowed many to reflect and ponder their decisions. Evidently, wisdom prevailed in many cases, because the resolution of technical problems has not triggered a rebound.
The fifth reason that Bitcoin is plunging is that all of its major crypto-rivals are also suffering. There is a sense that many cryptocurrency enthusiasts have suddenly started to question the very concept of a cryptocurrency. Ripple, one of the big stars of the crypto bull market of 2017, has dropped, as has Ethereum.
Bitcoin Ban in South Korea
There’s actually a sixth reason that Bitcoin is dropping like a brick. South Korea, China, and Japan view all cryptocurrencies with suspicion at best. Given the experience of the psychological nature of the Chinese market crash of 2015, Beijing has banned trading bitcoins altogether. China is doubling down, planning to prevent its citizens from accessing all cryptocurrency trading platforms, especially foreign ones.
South Korea has developed its own fears. Until recently, it was one of the most popular countries for bitcoins, said to account for some 20% of all bitcoin trades. Then, in the first week of the year, the government in Seoul blocked the possibility of selling their bitcoins. As a result, Koreans who owned them were forced to keep them in Bitcoin, unable to exchange them into other, “real” currencies. (Source: “South Korea is Going Bitcoin Crazy,” CNN, December 12, 2017.)
But based on the latest Bitcoin banned news, South Korea could soon join China in being one of the Bitcoin banned countries. Unlike, the Chinese, South Koreans will still be able to access foreign bitcoin trading platforms. However, more of them will start wondering whether it’s worth the risk. (Source: “Bitcoin-crazy South Korea may face a ban on cryptocurrency trading,” CNN, January 11, 2018.)