There have been some harsh words spoken on ‘investing’ in cryptocurrencies. Bill Gates, Warren Buffett, and Charlie Munger have trouble even calling it investing. You might think that these Bitcoin-critics are just jealous over missing the big returns Bitcoin has offered over the past years. You might also think that these people are just old and out of touch with our new digital economy. Then again, these people have been successful so you might also dig a little deeper and try to understand why they are opposed to cryptocurrencies.
Here are some quotes from Buffett, Munger, and Gates on buying cryptocurrencies:
Gambling and Investing Dialog
Buffett and co are not disbelievers in the disruptive technology that Bitcoin can provide. Quite the contrary, Bill Gates has called the blockchain technology “quite a good thing” in terms of sharing databases and verifying transactions. All three however point out that buying bitcoin is akin to gambling. Munger has stated this quite nicely: “the fact that it is clever computer science doesn’t mean that respectable people should encourage other people to speculate in it.” (Munger, CNBC – 2018)
So, what gives?
Well, it all boils down to a simple distinction between gambling and investing. According to Buffett, investing is a process where you take a productive asset, make some informed decisions about its future, compare its returns to the returns of other productive assets, and make a buy or not-buy decision.
A productive asset? So, what is a productive asset?
Well, it’s just something you can put your money in and it will give you a yearly return. Some examples:
- US Treasuries
- A House
- A Business (or shares in one)
- An Education
These are all examples of objects or services where you put a certain amount of money in upfront, and you get a periodical (yearly) sum of money back in return. Think about it like this. You pay $50,000 for an education and afterwards you get an income of $3000 monthly. Or you buy a house, rent it out, and get $1000 monthly.
And these productive assets are good things then?
Compared to non-productive assets, yes. But you still have to check whether the returns you get make sense. For instance, if you get an education and pay $50,000 upfront, get a salary afterwards of $3000, but your salary without the education would be $2800, you might questions whether the 200 bucks extra you’re getting is worth the $50,000 upfront payment.
I don’t understand. You get $200 extra and that is a bad thing?
No, but maybe you could’ve put the 50,000 in a business venture that will earn you $400 per month. In that case you would be better off keeping your $2800-job, put the $50,000 in the business venture and you end up with $3200 ($2800 + $400) instead of $3000.
Ok, so with productive assets you’re comparing the returns you can get and decide where to put your money in. So what where does bitcoin come in? I assume it’s not a productive asset then?
Indeed it is not. When you decide to buy Bitcoin all you are doing is hoping it’ll go up in price so you can sell it at a profit. It’s not just Bitcoin. Just to give you an idea, other non-productive assets are things like Rembrandt-paintings, gold, oil, stamps, etc. With these kinds of non-productive assets you’re always looking for someone who’ll pay more for the thing than you did so you can pocket the difference. With productive assets on the other hand, you’re making business decisions that provide yearly or monthly cash-flow. You don’t necessarily intend to sell the productive asset just because the price went up. See, you’re more interested in the cash-flow it generates than in the principal going up.
In the end investing has nothing to do with predicting which technology will disrupt everything. The main point in investing is finding an asset that can give you a decent return over a longer period of time (preferably one which is higher than the yield of a government bond).
A final example might illustrate the point:
Risk comes from not knowing what you’re doing.