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Warren Buffett, Crypto Troll

Recently, Warren Buffett continued his gratuitous criticism of bitcoin, stating that it “has no unique value at all. It doesn’t produce anything. You can stare at it all day and no little bitcoins come out.”

Previously he has said that “Cryptocurrencies will come to bad endings … If you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything.”, and other similar statements include, “You can’t value bitcoin because it’s not a value-producing asset.”, as well as “It’s a gambling device …. Bitcoin hasn’t produced anything.”

Although Warren Buffett claims not to know much about the internet, he is essentially trolling the crypto community. The headlines of the press in this revolutionary field were predictable, and one of the most revealing ones happened to be “Billionaire Warren Buffett Remains Clueless About Bitcoin”.

Here’s the real story about Warren Buffett and Bitcoin

Don’t fall for his feigned ignorance. He knows exactly what he is doing. While he may not be able to explain how the Lightning Network works, Mr. Buffett understands money and banking. He knows that bitcoin has the potential to disrupt the financial sector radically, in the same way that Amazon has disrupted retailing.

Let’s keep in mind that Warren Buffett has made most of his fortune by investing in the financial sector. As of the most recent filing for Berkshire Hathaway, 7 of his 10 largest holdings were in banks or related companies.

Like most people’s incentives in life, with Mr. Buffett you need to follow the money. Cloaked in folksy ignorance of technology, the billionaire’s attack on bitcoin is a measure of worry from the banking system’s largest beneficiary. Don’t ever forget that asking Warren Buffett what he thinks about bitcoin is like asking a taxi driver what he thinks about Uber.

In the next section of the article, we will break down Buffett’s disingenuous argument

Bitcoin’s Value

Warren Buffett knows perfectly well that bitcoin is money and that no government-issued currency has “intrinsic” value. US dollars, gold, bitcoin, etc. have value only to the extent that they are scarce and are commonly accepted to purchase goods and services. Money is a symbol, a representation of purchasing power; it is not valuable in itself.

If you are confused about money and intrinsic value, here is a thought experiment for you. Imagine that aliens show up tomorrow and want to sell us a cure for cancer. They want something valuable in return, to take back to their planet. Well, stacks of rectangular bills, atomic element 79, and 1s and 0s in a computer network probably won’t be seen as very valuable in their world. They are going to want something that has intrinsic value to them, like a work of art, not just a symbol of purchasing power on Earth.

Productivity

Warren Buffett doesn’t want the public to think of bitcoin for what it really is: money. Maybe because if people think of it as money, which can be exchanged directly with other individuals almost instantaneously and almost for free without going through a bank, it might cause a little problem for 7 of his 10 largest investment holdings.

Therefore, he makes the insightful observation that you can stare at this new-fangled money all day long, but it doesn’t produce additional little bits of money. Unlike staring at US dollar bills, you might be thinking…

The mistake is to think he is stupid or that he doesn’t get it. If you believe that, you fall for his deception. He gets it all right and he knows that bitcoin is incompatible with traditional payment methods and a fractional reserve banking system. Bitcoin is an existential threat to his banks. It is no random coincidence that Warren Buffett attacks the enemy of his financial empire, and does so in such a dishonest manner.

Fraud

Warren Buffett intentionally conflates bitcoin with utility token issuers, to scare the general public. Just one of his top holdings, Wells Fargo, has paid almost $15 billion in fines over the past 20 years. All of the US banks he is invested in have benefitted from government bail-outs. Buffett knows well that the greatest perpetrators of fraud, and the greatest cost to society, come from his portfolio companies, not from bitcoin.

The Oracle’s Secret

The biggest issue that Warren Buffett and others who really understand banking is trying to keep secret is much more sinister. What they really don’t want you to know is this: commercial banks create the majority of the money supply. Read that again: most of our money is created by privately-owned commercial banks. Not the Federal Reserve, not other central banks, not by the state.

Don’t believe that commercial banks create money? Well, how about asking some central banks themselves? In the United Kingdom, according to an obscure report in their in-house journal, the Bank of England states that 97% of the money supply comes from credit money creation by commercial banks. In Germany, according to the Bundesbank, the vast majority of money is created by commercial banks. In Switzerland, it is about 90%. Guess what it is in the United States? The percentage varies over time, but it is broadly above 90% in advanced economies.

Buffett’s banks create money in two ways.

  1. Through the creation of loans and concomitant deposit accounts. In this way, banks are essentially monetization entities: they exchange the requirement for future cashflows for the grant of purchasing power today.
  2. Through a credit multiplier effect, as deposits are moved between banks. Banks receiving new funds keep a fraction in reserve and then lend out the rest, growing the money supply.

Essentially, a commercial bank’s charter to grant loans is an authorization to create purchasing power, via deposit accounts. Banks then decide who in society gets to receive this purchasing power and the links between insider groups and banks is what contributes the most to inequality in society.

Bitcoin is fundamentally incompatible with this system, since there is no ability to create money with bitcoin.

Warren Buffett doesn’t attack bitcoin because he is worried about people losing money

On the contrary, he is behaving as a rational actor, concerned about his investments. He is protecting the geese that lay golden eggs: the banks that create money for him and his friends.

You want to know when adoption will really kick off, when the bitcoin price will increase significantly? Well, that will happen as more and more people learn about Warren Buffett’s true motives and the secret his banks are hiding.

So, when you hear Warren Buffett dismiss bitcoin, don’t rise to his baiting; see the troll for who he is. Money is about more than value; it is also about our values as a society. For those of you in the community of believers, recognize his attacks for what they are: a validation that bitcoin is increasingly challenging a corrupt old establishment.

Robert Sharratt lives in Geneva, Switzerland and writes about how banks suck. You can follow him here: @ReassureFin.

Image credit: Huffington Post

Read more:

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