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Share Dialog
Share Dialog
At the Berkshire Hathaway Annual Shareholder meeting Saturday (4/30), Warren Buffett, the legendary investor, once again claimed that bitcoin is worthless. However, this time, he gave explanations why he does not believe in bitcoin’s future. Essentially, he compares bitcoin to farmland and apartment houses in the US: “If you said… for a 1% interest in all the farmland in the United States, pay our group $25 billion, I’ll write you a check this afternoon,” “[For] $25 billion I now own 1% of the farmland. [If] you offer me 1% of all the apartment houses in the country and you want another $25 billion, I’ll write you a check, it’s very simple. Now if you told me you own all of the bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything. The apartments are going to produce rent and the farms are going to produce food.”
With all due respect to Mr. Warren Buffett and his wisdom, I believe the comparison is not reasonable and fails to understand where the value of bitcoin comes from. Basically, he is valuing bitcoin as stock, bond, tangible assets, or any assets that generate income for the owners. Stocks pay dividends, or at least investors believe they will for some growth companies. Bonds obviously pay interest, and tangible assets like land and machines can produce products thus income. from this perspective, Warren Buffett is right that holding bitcoin doesn’t generate income for its owners.
However, the truth is bitcoin is not a stock, a bond, or a tangle asset, it is in fact a currency just like US dollars. Now let me ask everyone a question, does holding USD generate income? NO! Then why do people use USD, and why do USDs have purchasing power? Because people believe in the United States and its economic, military, and cultural influence and its overall competitiveness as a nation. If one day the United States were to fall (I hope not), USD would have no value. There are many examples in history where nations’ currencies became worthless, and the governments had to replace their own legal tender with other countries’ currencies that are more stable, such as the USD.
Thus a currency’s value comes from people’s belief in the nation’s overall power, not that holding the currency can generate future income. So Warren Buffet is valuing bitcoin with the wrong methodology. Actually, Mr. Warren Buffett himself understands this very well, at the annual shareholder meeting, when joking about “Berkshire coins,” he said, “And there’s no reason in the world why the United States government… is going to let Berkshire money replace theirs.” It seems he understands bitcoin is a currency, not an income-generating asset; he just does not believe bitcoin is a good currency.
The truth is, in the very long term, bitcoin is probably a better currency than USD. What makes a good currency? Looking at history, we have seen many great empires with impressive achievements come and go. There is no guarantee any of today’s powerful countries (even the US, China, or Russia) will last another 100, 300, or 500 years.
So perhaps the right question to ask is, as investors, should we put more trust in bitcoin or the countries? Readers with some basic knowledge of blockchain should know that the bitcoin network is “trustless”, meaning people do not have to trust a central entity to use the network. People “trust” bitcoin because it is “trustless.” It is a decentralized network maintained by numerous nodes, and none of them have enough computing power to manipulate the blockchain’s data. By contrast, when sending money in today's banking system, you trust the banks or the people who manage them to do it for you. So the question boils down to “do you trust codes, physical laws, or logic more, or do you trust humans more?” This is a debatable question and probably too early to draw a conclusion. But as in Investment 101, diversification is critical to managing risks and achieving risk-adjusted alpha.
And one more thing to keep in mind is that bitcoin is deflationary in the long term. Bitcoin’s total supply is capped at 21 million. With the current block rewards (newly minted bitcoin for miners), the inflation is around 1.8% now. And the figure will only trend down as block rewards decrease and the circulating supply grows. Moreover, some bitcoins are permanently lost and out of circulation for various reasons (e.g., lost keys, passwords, recovery phrases), which will likely continue to happen, making bitcoin deflationary in the long term. By contrast, the US’s inflation rate was 8.5% y/y in March 2022, meaning USD’s purchasing power decreased by over 8% in just one year!
BTC’s Inflation Rate
US Inflation Rate
In summary, valuing bitcoin as an income-generating asset is not appropriate. Instead, it should be analyzed as a currency and probably the first deflationary currency in human history with large-scale adoption. The rise of bitcoin itself is an interesting social experiment, and I am eager to see the results in 10 or 20 years.
At the Berkshire Hathaway Annual Shareholder meeting Saturday (4/30), Warren Buffett, the legendary investor, once again claimed that bitcoin is worthless. However, this time, he gave explanations why he does not believe in bitcoin’s future. Essentially, he compares bitcoin to farmland and apartment houses in the US: “If you said… for a 1% interest in all the farmland in the United States, pay our group $25 billion, I’ll write you a check this afternoon,” “[For] $25 billion I now own 1% of the farmland. [If] you offer me 1% of all the apartment houses in the country and you want another $25 billion, I’ll write you a check, it’s very simple. Now if you told me you own all of the bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything. The apartments are going to produce rent and the farms are going to produce food.”
With all due respect to Mr. Warren Buffett and his wisdom, I believe the comparison is not reasonable and fails to understand where the value of bitcoin comes from. Basically, he is valuing bitcoin as stock, bond, tangible assets, or any assets that generate income for the owners. Stocks pay dividends, or at least investors believe they will for some growth companies. Bonds obviously pay interest, and tangible assets like land and machines can produce products thus income. from this perspective, Warren Buffett is right that holding bitcoin doesn’t generate income for its owners.
However, the truth is bitcoin is not a stock, a bond, or a tangle asset, it is in fact a currency just like US dollars. Now let me ask everyone a question, does holding USD generate income? NO! Then why do people use USD, and why do USDs have purchasing power? Because people believe in the United States and its economic, military, and cultural influence and its overall competitiveness as a nation. If one day the United States were to fall (I hope not), USD would have no value. There are many examples in history where nations’ currencies became worthless, and the governments had to replace their own legal tender with other countries’ currencies that are more stable, such as the USD.
Thus a currency’s value comes from people’s belief in the nation’s overall power, not that holding the currency can generate future income. So Warren Buffet is valuing bitcoin with the wrong methodology. Actually, Mr. Warren Buffett himself understands this very well, at the annual shareholder meeting, when joking about “Berkshire coins,” he said, “And there’s no reason in the world why the United States government… is going to let Berkshire money replace theirs.” It seems he understands bitcoin is a currency, not an income-generating asset; he just does not believe bitcoin is a good currency.
The truth is, in the very long term, bitcoin is probably a better currency than USD. What makes a good currency? Looking at history, we have seen many great empires with impressive achievements come and go. There is no guarantee any of today’s powerful countries (even the US, China, or Russia) will last another 100, 300, or 500 years.
So perhaps the right question to ask is, as investors, should we put more trust in bitcoin or the countries? Readers with some basic knowledge of blockchain should know that the bitcoin network is “trustless”, meaning people do not have to trust a central entity to use the network. People “trust” bitcoin because it is “trustless.” It is a decentralized network maintained by numerous nodes, and none of them have enough computing power to manipulate the blockchain’s data. By contrast, when sending money in today's banking system, you trust the banks or the people who manage them to do it for you. So the question boils down to “do you trust codes, physical laws, or logic more, or do you trust humans more?” This is a debatable question and probably too early to draw a conclusion. But as in Investment 101, diversification is critical to managing risks and achieving risk-adjusted alpha.
And one more thing to keep in mind is that bitcoin is deflationary in the long term. Bitcoin’s total supply is capped at 21 million. With the current block rewards (newly minted bitcoin for miners), the inflation is around 1.8% now. And the figure will only trend down as block rewards decrease and the circulating supply grows. Moreover, some bitcoins are permanently lost and out of circulation for various reasons (e.g., lost keys, passwords, recovery phrases), which will likely continue to happen, making bitcoin deflationary in the long term. By contrast, the US’s inflation rate was 8.5% y/y in March 2022, meaning USD’s purchasing power decreased by over 8% in just one year!
BTC’s Inflation Rate
US Inflation Rate
In summary, valuing bitcoin as an income-generating asset is not appropriate. Instead, it should be analyzed as a currency and probably the first deflationary currency in human history with large-scale adoption. The rise of bitcoin itself is an interesting social experiment, and I am eager to see the results in 10 or 20 years.
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