Berkshire Hathaway (BRK.A +0.16%)(BRK.B +0.14%) hosted its 2022 annual shareholders meeting on Saturday. It was the first in-person meeting since 2019. As usual, Warren Buffett and Charlie Munger discussed many key topics and offered deep insights.
In the opening remarks, Buffett praised the U.S. dollar as a means of exchange even during inflationary times, in part because it's backed by the federal government. Without saying it, he seemed to imply that Bitcoin (BTC +0.48%) and its crypto alternatives will never replace the U.S. dollar because decentralized currency doesn't come with the same guarantees.
To be fair, Munger -- who never hides his aversion to cryptocurrency -- wasn't so subtle. In response to one question about inflation and what inflation-resistant stock to invest in, Munger said, "I got some advice for you, too. If your friendly advisor suggests you put all of your money into Bitcoin, just say no."
However, toward the end of the question-and-answer session, Buffett and Munger were once again asked about crypto, and they let loose with commentary on the subject. Here's why Buffett and Munger still dislike crypto, but that doesn't mean it can't be a good long-term investment for risk-tolerant folks.
Image source: Getty Images.
Buffett argues that Bitcoin is not a productive asset
Berkshire Hathaway is known for investing in traditional businesses that are easy to understand. The ideal business produces a good or service and sells it to customers for more than it costs to produce. In the process, it generates earnings. It uses extra profits to repurchase its own stock, pay dividends, pay down debt, or reinvest in the business. This is essentially how companies like Apple and Coca-Cola function as reliable passive income streams.
Berkshire looks for what it calls a productive asset, meaning something like a farm, a McDonald's franchise, a mining company, or an apartment complex. Buffett said the following on the subject of productive assets versus cryptocurrency:
If the people in this room owned all of the farmland in the United States, and you offered me a 1% interest on all of the farmland in the United States, and the price is $25 billion, I'll write you a check this afternoon. If you tell me you own 1% of the apartment houses in the United States, and you offer me a 1% interest in all of the apartment houses in the country, and you want whatever it may be, another $25 billion or something, I'll write you a check. It's very simple. Now, if you told me you owned all of the Bitcoin in the world, and you offered it to me for $25, I wouldn't take it, because what would I do with it? I'd have to sell it back to you one way or another. It isn't going to do anything. The apartments are going to produce rentals and the farms are going to produce food. If I've got all the Bitcoin, I'm back to whatever his name was who may or may not have existed. He could create a mystery about it, but everyone knows what I'm like, I mean, so if I'm trying to get rid of it, people will say, why should I buy Bitcoin from you? That explains the difference between productive assets and something that depends on the next guy paying more than the last guy.
From Buffett's comments, it is clear that he does not see the intrinsic value of Bitcoin as a safe, secure, fungible, and easily transferable store of wealth.
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Key Data Points
Buffett argues Bitcoin undermines the U.S. dollar, which in turn hurts the U.S. economy
Buffett's whole life has centered around the success of the United States and its ability to innovate and increase its global presence through trade. So it's only natural that Buffett, who bought his first stock at age 11, a year before Pearl Harbor, would defend the U.S. financial system. Buffett said the following during the presentation:
Basically, assets, if they have value, they have to deliver something to somebody, and there's only one currency that is acceptable [the U.S. dollar]. You can come out with all kinds of things, we can put up Berkshire coins or Berkshire money or anything like that, but in the end, this is the only thing that is money. And anybody who thinks the United States is going to let Berkshire money replace theirs is out of their mind. Whether it goes up or down in the next five or 10 years, I don't know. But the one thing I'm pretty sure of is it doesn't produce anything. It has a magic to it. But people have attached magic to a lot of things.
Buffett and Munger distrust decentralized finance
Probably the root cause of vehement opposition from Buffett and Munger to cryptocurrency stems from their distrust of decentralized finance. Berkshire operates many insurance businesses. Bank of America and American Express are both top-five public equity holdings of Berkshire Hathaway.
To understand someone's opinion, it's important to know where they are coming from. Buffett and Munger have spent their entire lives joined at the hip to the American financial system. They are the first to admit its failings but are also swift to come to its defense, saying it's better than what is available in other sovereign nations.
Munger, who has always been deeply opposed to cryptocurrency, had the following to say during the shareholder meeting:
I have a slightly different way of looking at it. In my life, I try to avoid things that are stupid and evil and make me look bad in comparison with somebody else, and Bitcoin does all three. In the first place, it's stupid because it's very likely to go to zero. The second point is it's evil because it undermines the Federal Reserve system and the national currency system, which we desperately need to maintain integrity and government control and so on. And third, it makes us look foolish compared to the Communist leader in China..
What it means for you
The following chart shows the drawdowns of four major cryptocurrencies and four well-known growth stocks.
Bitcoin Price data by YCharts
For all of the crypto craziness, it has been remarkable to see Bitcoin and Ethereum suffer relatively manageable drawdowns while some growth stocks are down 70% but are still bursting with long-term potential. Even Solana (SOL 0.22%) and Cardano (ADA 2.14%), which are relatively newer and unproven altcoins have suffered less severe drawdowns than well-known companies like Block, Roku, Teladoc Health, and even Shopify.
Buffett makes a good point. Bitcoin and other cryptocurrencies can't succeed with mere magic. And in many ways, the Dogecoins and Shiba Inus of the world are merely shadows and dust with little to no real value. But Ethereum, Cardano, and Solana all have real use cases in decentralized finance. All three coins, and even Bitcoin, are still young and lack a real track record. But for investors who understand the risk/reward profile and are willing to invest in these assets for decades to come, opening a starter position in crypto isn't the worst move to make in a bear market.
