To the surprise of nobody, Warren Buffett isn’t interested in Bitcoin at all. He just recently told CNBC that…
…in terms of cryptocurrencies I can say almost with certainty that they will come to a bad ending.
In his view, cryptocurrencies are a bubble that are purely driven by speculation. Not surprisingly, his top advisor Charlie Munger recommended to “stay way from Bitcoin like the plague”.
But why is Buffett so adamant about criticizing crypto currencies?
A closer look at Buffett’s investment strategy reveals that Bitcoin and Buffett were never posed to be a love affair. Buffett’s investment strategy circulates around the concept of intrinsic value.
Buffett defines intrinsic value as follows:
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.[1]
To give you an example: Buffett bought about $ 1 billion in Coca Cola stock in 1988. Coca Cola has lots of intrinsic value: People all around the world consume Coca Cola, thereby creating a steady stream of profits for the company. These profits make Coca Cola a valuable company.
Now, what Buffett looks for are companies whose market cap is significantly lower than their intrinsic value. In other words, Buffett looks for companies that are significantly undervalued, just like Coca Cola in 1988.
Now let’s check again what Buffett says about Bitcoin:
The idea that [Bitcoin] has some huge intrinsic value is just a joke in my view
And Buffett is right. Currently, the price of Bitcoin is mostly driven by speculation, and not by an underlying profit stream that justifies the price.
Basically, Bitcoin is the opposite of what Buffett is looking for: Buffett prefers investments with high intrinsic value and a low price. Bitcoin has hardly any intrinsic value (by Buffett’s definition) and a high price. No wonder that Buffett recommends:
Stay away!
Does this mean that Bitcoin investments are doomed? I don’t think so. Even though Buffett is insanely successful, his investment strategy is not the only one that works. Buffett’s investments are generally rather conservative; with large positions in mature businesses. Investing in promising, yet un-validated business models is outside of Buffett’s strategy - yet other investors have been very successful with this approach. It might be the same with cryptocurrencies - even Buffett admits that he “doesn’t know anything about it”.
So, with all respect to Buffett - he and Bitcoin were just never meant to be. That shouldn’t necessarily discourage you from investing - as mentioned, there are other investment strategies that work just as well (or even better).
PS: Buffett’s $1 billion investment in Coca Cola is now worth $ 19 billion. That’s just as much as Satoshi Nakamoto’s stake in Bitcoin if the Bitcoin price increases to $19,400 again