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Here's Why Warren Buffett is Right About Bitcoin

In a highly publicized interview on CNBC, Berkshire Hathaway CEO Warren Buffett dismissed bitcoin as an investment, even going so far as to call it a "mirage". In response, tech heavyweight Marc Andreessen says bitcoin is yet another technology Buffett simply doesn't understand. While the notion Buffett doesn't exactly embrace new technologies may indeed be true, he is right about bitcoin and technological advances in general, at least from an investment perspective. Here is one of the most valuable lessons from Buffett's investing style and how you can apply it to your portfolio.

Source: Mark Hirschey

Buffett's comments and why he made them
Buffett said bitcoin is essentially an updated version of writing a check or sending someone a money order. In other words, it's simply a new, more efficient way of transmitting money. He's not discounting the usefulness of bitcoin to make payments and transfer money, just the intrinsic value it supposedly has as an investment.

Andreessen immediately took to Twitter and said how Buffett is always dismissing technologies he doesn't understand. This is absolutely true, and he did the same thing during the dot-com bubble. However, he has been right about new technologies as investments.

Buffett's best advice
In an article published at the height of the dot-com bubble, Warren Buffett offered his simple definition of what investing is: "Investing is laying out money now to get more money back in the future -- more money in real terms, after taking inflation into account." He also pointed out how transforming an industry (like bitcoin may do) doesn't necessarily produce a sound investment opportunity. He referenced how the airline and auto industries revolutionized transportation, yet neither has ever been a very sound investment. There have been over 2,000 car manufacturers in U.S. history... how many are still around today?

One of the best lessons you can learn from Buffett is how the most important thing to do when investing is to assess the competitive advantage of a company and the durability of the advantage. Does bitcoin have a competitive advantage in the virtual currency business? Absolutely. Will that advantage last for decades? Maybe, but maybe not.

So where should the majority of your savings be invested?
There is no one-size-fits-all answer to this question, but a good way to get started is to look at a list of Berkshire Hathaway's current holdings.

The first thing you should notice is the absence of tech companies, with the exception of IBM which is more of a business-service company these days.  Most of Berkshire's holdings are in industries like insurance, banking, food and beverage, clothing, materials, and media. These businesses have all been around for centuries (in one form or another) and will be needed for the next 100 years and beyond. People will always need to eat, wear clothes, build homes, get the news, and keep their money safe.

However, in this respect, bitcoin could still qualify. They do represent a way for people to transfer money safely, which will always be needed. However, the other thing you'll notice is that for every Berkshire holding, it is easy to make the case for a durable competitive advantage. For instance, Wells Fargo has the advantage of one of the highest-quality asset portfolios in the banking sector. Coca Cola offers a diverse portfolio of products and has the advantage of "economies of scale", or the cost advantage of mass production. Why is bitcoin more competitive than say, mobile payment software? Most people seem to get along just fine in their lives without bitcoin.

Now take a look at your own portfolio. For each company, decide whether their business will be needed in 100 years. If you can't say yes with absolute certainty, it wouldn't be good enough for Berkshire. Next ask yourself what each company's particular competitive advantage is. Any company you are holding as a long-term investment should have a clear answer to this question.

Don't confuse investing with speculating
I'm not trying to steer you away from trying to get in on the "next big thing". However, this is speculating, not investing. There is absolutely nothing wrong with allocating a small percentage of your portfolio (say 5%) into speculative investments like bitcoin, smartphone companies, OLED display manufacturers, and so on. Putting your money into these companies could absolutely make you tons of money. But they could also go bankrupt in a few years -- there is no way to know for sure.

As long as you understand what an investment is, and allocate the majority of your portfolio accordingly, you should be just fine over the long run. You can have a little fun and experiment with potential "home runs", but a bunch of base hits over several decades will serve you much better than one or two grand slams.

The greatest thing Warren Buffett ever said
Warren 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2014, at 4:15 PM, MotleyBurger wrote:

    "While the notion Buffett doesn't exactly embrace new technologies may indeed be true, he is right about bitcoin and technological advances in general"

    The entire premise of your article is incorrect. Bitcoin does not equal technological advances in general. Every single example you gave references centralized organizations with single points of failure, single budgets, and all their eggs in one basket. As has been stated ad nauseum, Bitcoin is not a company. Its not a person. Its not an organization. Its a protocol. A foundational layer that enables other things to happen. Comparing Bitcoin to the airline industry is a completely false analogy, for this very reason. If the airline industry had provided Wind and Air for which to make flight possible, then you would have a correct analogy on your hands. Bitcoin is the Wind and the Air. It is not the Airline.

  • Report this Comment On April 06, 2014, at 3:50 PM, JackL1 wrote:

    Why no mention that Buffet was the single largest recipient of banker bailout money during the 2008 government bailouts of the banks??????

    Of course he is going to hate anything like bitcoin, which competes with his government scam system where he gets free money from the federal reserve who creates FIAT out of thin air.

  • Report this Comment On April 06, 2014, at 10:23 PM, Beaugas wrote:

    People are missing the major concept about Bitcoin. There is the currency aspect, ie what a Bitcoin is worth and what it will be worth, and there is the platform on which it is built. The blockchain on which the Bitcoin is based, is a decentralized (not controlled by any government) open source (how it's built is open for all to see) universally distributed and agreed upon public ledger of transactions. Applications are being rapidly built on this mathematically based, cryptographically protected and verified platform that will dramatically change how we transact and verify ownership. That's what Buffett and most others just don't get.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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