Let’s all lay off Warren Buffett!

Why your reaction to Warren Buffett's recent comments may say more about you than it does about him.

Legendary investor Warren Buffet made some comments about cryptocurrencies this week and the crypto community has been frothing at the mouth in its attempts to tear him down. This is neither surprising from him, nor from us in the community. Buffet (a noted bitcoin sceptic) is known to be a very conservative investor, so its not surprising that a volatile asset like Bitcoin would be of no interest to him. Similarly, our community is known for launching, with a similar level of volatility, into anyone who dares to question us. In this post I’m going to argue that we should all just chill out a little and cut Warren some slack.

What did he say?

The first thing to do is make sure you actually know what he said. It was difficult to track down his actual comments. Various mash ups were reported by different news agencies, as they tried to spin the article one way or another. As best I can tell, here is what he really said. The following is sourced from an Australian news-media website:

“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending. When it happens or how or anything else, I don’t know.”

This should come as no surprise to anyone when it comes from Warren Buffet. It should also be no surprise because its most likely true. The market we are in truly abnormal. Crypto markets (as measured by the top 100 coins) are up by 21.19% this year. That’s 21% in 13 days. They are up by 250% over the past month, and 3,824% over the past 12 months. Anyone who honestly believes this can continue forever is naive. This is a once in a lifetime investment opportunity. If you’re lucky enough to be taking part in it, then be thankful. But don’t expect it to last forever.

Also note what he did not say. He did not predict a market crash. He also did not predict the end of crypto. He simply predicted that the current frenzy of speculative investing would end badly, and it will for many people. Some people may take issue with this point, but I am happy to stand by it. I don’t know where, and I don’t know when, but at some stage this bad boy is going to come crashing down. BTC is only 9 years old, and twice in its history it has declined by over 90% over a 3-6 month period. That’s a horrific ending for anyone who bought in near the top. You scream HODL and you may be right, but there’s a lot of people out there who won’t HODL and they’ll lose big.

If you’re still sceptical then I ask you to look at it from another angle. Ask yourself the following questions:

• Is it likely that Bitcoin, Bitcoin Cash and Bitcoin gold all survive?

• Is it likely that Bitcoin, Litecoin, Vertcoin and all of the other pure currencies all survive?

• Is it likely that both Ethereum and Ethereum Classic both survive? What if a new technology was released that made Ethereum redundant. Some would point to projects like EOS as a potential Ethereum buster.

• What about Monero, Verge, Zcash and all the other privacy coins. Is there space in the market for all of them?

• What about Storj and Siacoin?

• Or all the various iterations of Potcoin/Dopecoin etc

• I could go on….

Some of these projects will be spectacularly successful. Other will fail catastrophically, and those invested in them will lose a lot of money. So, predicting a bad ending for the current crypto craze doesn’t seem to farfetched to me. Hopefully it won’t be a bad ending for you. But it will be a bad ending for someone. And when it comes, I suspect it will be spectactular.

“If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth,” he said. “We don’t own any, we’re not short any, we’ll never have a position in them.”

This is the statement that I think has caused the most people to lose their mind. Note the time frame. A five-year put. That means he thinks that the market will fall at some point over the next five years. Not tomorrow, not 2018, or even 2019. No prediction at all. Just a bet (that’s what a put option is) that at some point in the next 5 years markets will fall. I’m pretty comfortable with that bet.

Also note what he won’t do, which is short crypto. For those without a financial background, this is important because when you buy a put option (what he said you would buy), the most you can lose is the price of the option. You can never lose more than your initial investment. If you short an asset however (what he will do), your potential loses are infinite. So, he would make a reasonable bet that at some point in the future markets will fall, but he also knows, just like you and I, that from here Crypto could go to the moon. He’s a pretty smart guy Warren.

“There is no reason. I get into enough trouble with things I think I know something about, why in the world should I take a long or short position in something I don’t know anything about?”

This is standard Buffett speak. He is known for making his money in industries that other people find boring, like insurance and railways. I suspect he’s never made an investment in a start-up, or cutting edge technology in his life. He’s also well known for only investing in businesses that he can understand. He doesn’t understand crypto, so he’s staying away from it. There’s a lesson for everyone in that statement.

What can we conclude?

So that’s what he said. All in all, I think it’s pretty unremarkable. Maybe we can tone down the rhetoric a notch or two. Especially when you take into account what else we know about Warren Buffett.

Buffett is the third richest man in the world, with Forbes magazine estimating his net wealth in 2017 at $73.1 billion dollars. He is the greatest investor of all time. Hands down, no competition. He’s achieved a total return for his investors of over 2 million percent since he started his business, Berkshire Hathaway. That’s a total return of over 2 million percent (Source). He has committed to giving 99% of his net wealth to charity when he dies (that’s $71.6 Billion) and has already started, by giving away $600 million over the past 5 years (Source). He has consistently campaigned for higher taxes on the wealthy (Source), (Source), and has also been a champion of index investing, a form of investing that emphasises minimising the fees paid to Wall St (Source). He’s about as far from the agent of the deep state that some people have tried to paint him as you can get. There is a reason he chooses to live in Omaha, Nebraska and not New York City.

Perhaps the best reason to not blow all this out of proportion is this.

It’s embarrassing

The collective temper tantrum thrown by the crypto community every time anyone dares to question us borders on the ridiculous. If you have done your own research, believe in the technology and think that you’ve selected good investments, then HODL. You should have enough confidence in your own judgement to tolerate dissenting opinions. There’s some behavioural psychology at play here, as your brain is wired to dislike hearing opinions that contradict your own. I also suspect there is a little bit of fear, with people wanting to believe this will go on forever, and not wanting to contemplate the alternative. This point aside, if you have confidence in your own ability to pick good investments, it should make no difference to you what Warren Buffett thinks of your investment strategy. I’m pretty sure he doesn’t care what you think of his.

I’d recommend a different path though. Warren Buffett isn’t the greatest investor of all time for no reason. He’s an incredibly intelligent and talented person. I would caution you to be careful about disregarding the opinions of successful people. They are certainly not always right, but you can often learn a lot from them. There is an old saying that one of the best ways to become successful is to surround yourself with successful people. I think this applies as much in the cyber world as it does in real life.

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