Rajat Soni, CFA - Warren Buffett: "Bitcoin will come to a bad ending"
The speaker argues that Warren Buffett's negative stance on Bitcoin stems from using traditional stock valuation metrics, which are inappropriate for evaluating Bitcoin. Buffett's prediction that Bitcoin would end badly has been proven wrong as Bitcoin's market cap has grown significantly. The speaker highlights that Bitcoin should be viewed as money, not a business, and thus should not be evaluated based on cash flow or earnings metrics. Instead, Bitcoin's value lies in its role as a store of value, medium of exchange, and unit of account, competing with traditional currencies and assets like gold and real estate. The speaker emphasizes Bitcoin's decreasing inflation rate and its potential to absorb value from other assets over time, making it a more stable and reliable store of value.
Key Points:
- Warren Buffett's traditional metrics for valuing stocks are not suitable for Bitcoin, which is money, not a business.
- Bitcoin's market cap has grown significantly, contradicting Buffett's prediction of a bad ending.
- Bitcoin competes with traditional assets and currencies as a store of value, medium of exchange, and unit of account.
- Bitcoin's inflation rate is decreasing, making it a more stable store of value compared to fiat currencies.
- Investors should conduct their own research on Bitcoin rather than relying on Buffett's outdated views.
Details:
1. 🔍 Challenging Warren Buffett's View on Bitcoin
- Warren Buffett has consistently expressed skepticism about Bitcoin, predicting that cryptocurrencies will end badly, reflecting his cautious approach to untested financial instruments.
- Despite his strong stance, Buffett avoids shorting Bitcoin directly, acknowledging his lack of expertise in the area, which highlights his principle of investing within his circle of competence.
- Buffett emphasizes his preference for investing in businesses he understands over speculative assets, comparing Bitcoin to commodities like cocoa beans, which do not produce value on their own.
- This skepticism is rooted in Buffett's broader investment philosophy, focusing on tangible value and long-term growth, contrasting with the volatile and speculative nature of cryptocurrencies.
- Buffett's views challenge investors to consider the underlying value and growth potential of their investments, aligning with his historical successes in traditional markets.
2. 📊 Comparing Bitcoin with Berkshire Hathaway
- In January 2018, Berkshire Hathaway's market cap was $500 billion, while Bitcoin's market cap was less than $200 billion, with a Bitcoin price of $14,000.
- Currently, Bitcoin ranks seventh globally in market cap with $2 trillion, surpassing Berkshire Hathaway, which is 14th with a $1 trillion market cap.
- Historically, if Berkshire Hathaway shares were valued in Bitcoin in 2018, they would have equaled 35 million Bitcoin, exceeding the total Bitcoin supply at that time.
- Presently, Berkshire Hathaway is valued at approximately 10 million Bitcoin, highlighting Bitcoin's increasing absorption of value from traditional assets like Berkshire Hathaway.
- This shift indicates a significant trend where digital assets like Bitcoin are increasingly becoming major players in global asset rankings, challenging traditional financial giants.
3. 💼 Bitcoin: A New Asset Class
- Bitcoin competes with traditional assets like gold, Apple, Nvidia, and Microsoft as a store of value by taking market share from them.
- Investors often buy stocks like Apple blindly, driven by the expectation of continuous price appreciation, despite associated risks.
- Bitcoin is presented as a less risky alternative to stocks like Apple, with the potential for faster value appreciation over the next 10 to 30 years.
- The evaluation of Bitcoin using traditional stock valuation metrics, such as those used by Warren Buffett, is flawed because Bitcoin is fundamentally different as it is a form of money, not a company.
- Unlike traditional stocks, Bitcoin's value proposition lies in its decentralized nature and fixed supply, which make it a hedge against inflation and currency devaluation.
- Traditional valuation metrics fail to capture Bitcoin's utility as a global, censorship-resistant form of money, which offers a unique investment opportunity distinct from equities.
4. 📈 Misapplying Stock Valuation to Bitcoin
- Bitcoin should not be valued using traditional stock valuation metrics such as discounted cash flow models because it does not generate cash flow like a business.
- Bitcoin acts as money and competes with the US dollar as a medium of exchange, unit of account, and store of value, rather than generating cash flow or earnings.
- Metrics such as price-to-earnings ratio, enterprise value to EBITDA, and asset-based valuation do not apply to Bitcoin as it is not a business and has no earnings, physical assets, or liabilities.
- Bitcoin is a network of people agreeing to a set of rules, and its valuation should reflect its role as a currency with 21 million units that can be subdivided and transferred.
- Using stock-related metrics to value Bitcoin results in incorrect and nonsensical outcomes, as Bitcoin does not have market price per share, revenue, or dividends.
5. 🏠 Real Estate vs. Bitcoin: A False Comparison
- Real estate is valued through metrics like cap rate, which involves calculating net operating income (NOI) divided by the property's current market value, providing cash flows and utility. In contrast, Bitcoin is often criticized for lacking inherent value due to its absence of cash flows.
- The comparison of real estate to Bitcoin is likened to the choice between Netflix and Blockbuster, emphasizing Bitcoin's superiority in retaining value and avoiding debasement, particularly as it competes with fiat currency as a better form of money.
- Real estate provides physical shelter and business locations, roles which Bitcoin does not fulfill. Bitcoin's primary function is as a form of money, which makes direct comparisons with real estate challenging.
- While the sales comparison approach can be applied to Bitcoin by examining trends in prior sales, it is limited due to Bitcoin's uniform characteristics.
- The cost approach to Bitcoin involves considering the replacement cost. For instance, if Bitcoin was purchased for $5,000, replacing it might now cost $100,000, highlighting the effective reproduction cost.
- Bitcoin does not generate rental income, nor does it face challenges like vacancies or credit losses, which are typical considerations in real estate.
- Market trends are relevant for Bitcoin as its price trends can be observed over time, unlike real estate, which is influenced by specific location factors.
6. 💡 Bitcoin's Role in the Financial Ecosystem
- Bitcoin is increasingly seen as a superior store of value compared to traditional assets like real estate and stocks, by offering a stable store of value over time and potentially extracting significant value from these assets as savings vehicles.
- Real estate, traditionally used as a store of value, is being challenged by Bitcoin due to its predictable supply and capped limit of 21 million, making it a clearer savings target for the future.
- Bitcoin's inflation rate, historically dropping from 100% to 3.22% and projected to fall below 1% after the next halving, positions it as a better inflation hedge than gold, whose inflation rate is higher.
- Bitcoin could potentially reduce the market share of fiat currencies like the US dollar and Euro by becoming a dominant medium of exchange, given its increasing purchasing power and stable supply.
- The decreasing inflation rate and increasing difficulty in Bitcoin production make it a harder asset than gold, enhancing its attractiveness as a savings option compared to dollars, which lose value due to inflation.
7. 🧠 Educating Yourself About Bitcoin
- Avoid making Bitcoin decisions solely based on opinions from figures like Warren Buffett, who may lack research in the area.
- Engage in personal research to understand Bitcoin rather than relying on potentially uninformed opinions.
- Access a wealth of educational resources, including 250 videos available from the content creator.
- Join a community for $20 a month to receive additional content, including a Bitcoin for beginners mini-course and purchase/storage master class.
- Additional resources also cover personal finance, enhancing the overall learning experience.