Warren Buffett, the billionaire investor and CEO of Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.18%), expressed his opinions on bitcoin and other cryptocurrencies in a CNBC interview, and it's fair to say that you won't see the Oracle of Omaha putting his money into bitcoin anytime soon. Here's what he said about the cryptocurrency boom and why he won't short bitcoin despite his negative outlook.
Buffett doesn't see a bright future for cryptocurrency investors
Buffett told CNBC in a recent interview that the cryptocurrency mania around the world isn't going to have a happy ending.
"In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending," Buffett said. He doesn't know when it will happen or what will trigger a collapse, but he's quite confident that the ultimate direction of all cryptocurrencies is down.
Berkshire's vice chairman, Charlie Munger, is equally pessimistic on cryptocurrencies. In 2017, he said that bitcoin is "total insanity," and in the same CNBC interview where Buffett made his comments, Munger said that investors "are excited because things are going up at the moment and it sounds vaguely modern. But I'm not excited."
But he's not about to short bitcoin, either
Although Buffett has a negative outlook for cryptocurrencies, you won't see him shorting them anytime soon.
"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."
The recent introduction of bitcoin futures allows traders to bet against the leading digital currency for the first time, and while it may seem like a no-brainer for a bitcoin bear like Buffett, it's far too dangerous.
Simple put, the reward potential doesn't justify the risk, especially for an asset that is as volatile as bitcoin. For example, let's say that you shorted one bitcoin while it traded for $14,000. If bitcoin fell to zero, the most you can make is $14,000 on your trade. On the other hand, the loss potential is unlimited. I've said that under the right circumstances, bitcoin could get much higher. If bitcoin were to reach $100,000, for example, your short position would result in a loss of $86,000.
Should you stay away, too?
To be perfectly clear, I never suggest basing any investment decision on what a billionaire says or does, even if that billionaire is Warren Buffett.
Having said that, even if you disagree and think that cryptocurrencies are just getting started, it's important to pay attention to his wisdom in his comments.
In particular, his comments about not knowing anything about bitcoin is a good lesson to learn. It's easy enough to lose money investing in the things you know well. Buying things you don't know well is a terrible idea, no matter what it is. So, if you're going to put some money into bitcoin, another cryptocurrency, or an ICO, be sure that you fully understand what you're getting into.
Also, if you agree with Buffett, that doesn't mean shorting bitcoin futures, or bitcoin-related stocks for that matter, is a good idea, either. Buffett is 100% right in this area as well. Even if you short a relatively small position, bitcoin's future is so uncertain that your losses on a short position can become catastrophic in a brief period of time.
The bottom line is that bitcoin and other cryptocurrencies are highly speculative assets and should not be considered "investments" in the long term sense of the word. If you want to bet on the future price of cryptocurrencies, do it with money you could easily afford to lose -- say, with $100 that you were already going to spend. You shouldn't bet your future financial security on anything, and cryptocurrencies are no exception.