Would Warren Buffett Buy Bitcoin?

Warren Buffett of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) is one of the most successful investors of all time, and his thoughts on gold will likely tell us what he thinks of Bitcoin.

Source: Flickr/BTC Keychain.

The gold rush
In September of 2011, the price of gold hit $1,861 per ounce, which capped off an incredible 10-year run that saw the price of gold rise on average each year by 21%.

If someone had invested $1,000 in gold, it would have turned into $6,830 over those 10 years, whereas a $1,000 investment in the S&P 500 would have only left them with only $1,055.

Source: St. Louis Federal Reserve.

When gold prices began declining in November of 2011, CNBC speculator Jim Cramer said "the vicious decline in gold is signaling the collapse of the current financial order, an order that's based on printing money to cover up problems." Cramer gave three reasons he thought gold would continue to rise, highlighting that the European banking crisis, the strong demand from central banks and citizens of emerging nations, and the limited supply of gold would help boost prices.

With the prospect of a looming economic collapse in Europe, Cramer concluded:

"Yes, it's true that a severe recession in Europe is bad for gold, but we had one here, and how did gold do? It went up, not down. So keep owning gold. And if you don't own any, I would be buying some here."

With gold garnering all the attention of the financial media, Buffett chose to address the topic in his letter to shareholders in February of 2012, noting there are "assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century."

He goes on to say; "Gold, however, has two significant shortcomings, being neither of much use nor procreative... if you own one ounce of gold for an eternity, you will still own one ounce at its end," before he gave the following example:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 ExxonMobil (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Of course, Buffett proved to be correct, as the fall of 2011 marked the beginning of the end of the run on gold, and currently prices are down 33% from their peak, while the price of the S&P 500 has risen by more than 50% since September 2011. The chart below outlines the dramatic collapse in its value:

Source: St. Louis Federal Reserve.

Buffett on Bitcoin
Recently we have seen another incredible run in the price of a supposed asset, and that, of course, is Bitcoin, which has watched its price rise more than 9 times (from $128 to $1,182) since June of this year:

Source: Bitcoin Charts.

This has led to many speculators diving into the currency, including noted investors Cameron and Tyler Winklevoss, proclaiming that the potential market capitalization could rise to more than $400 billion-- versus the current $14 billion.

Yet like gold, Bitcoin has many of the same properties. There's a limited supply, and theoretically an unlimited demand -- however in the end, it doesn't produce anything, and it's only worth something because the market participants say it is.

It is not difficult to imagine a day when Bitcoin is worth exponentially more than it is today just as it is not difficult to imagine a day when it will be worth far less. Yet considering that Buffett has a preference for assets that produce things, versus cubes that sit in baseball fields, and his wisdom that "bubbles blown large enough inevitably pop," it is easy to presume we will not be seeing him purchase a Bitcoin anytime soon.

What Buffett would buy
While he may not be buying Bitcoin anytime soon, the reality is Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

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  • Report this Comment On December 08, 2013, at 1:38 PM, ultra20099 wrote:

    Another reason he wouldn't invest in it is because he doesn't understand it. He says that he won't invest in anything he can't understand.

  • Report this Comment On December 08, 2013, at 3:26 PM, naples2627 wrote:

    At the 2013 annual meeting in Omaha, a college student asked Warren Buffett what he thought of Bitcoin. His answer was short, I have no idea what Bitcoin is.

  • Report this Comment On December 09, 2013, at 1:56 PM, Larsen wrote:

    The writer has confused the index return with investor return. An investor who owned the S&P 500 over the period mentioned above 9/1/01 to today, would have gotten a 55% return, as measured by the SPY ETF. The difference is probably mostly compounded dividends. This is a particularly important point, since it's part of the reason Buffett prefers equities.

  • Report this Comment On December 09, 2013, at 7:06 PM, AnsgarJohn wrote:

    Buffett buys money making machines. If he invests in 100 bitcoins, he'd want it to increase to 115 bitocins next year.

    Good businesses make money, like a Sampo. (The Sampo, according to The Canine Kalevala, is “a fabled device that churned out salt, flour and coins. Whoever had a Sampo never had to work, or suffer from hunger, or go running around in the dark woods. A Sampo made life easy for its owner.”)

    Or as Buffett puts it, collect geese that lay golden eggs, instead of just eggs.

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