Might the Oracle of Omaha, Warren Buffett, ever get on board with investing in an asset like Bitcoin, (BTC +0.21%) which -- on the surface -- breaks all of his traditional rules for investing?
It's more reasonable than it sounds. Here's why.
CRYPTO: BTC
Key Data Points
This perpetual skeptic is missing the forest for the trees
Buffett's disposition toward Bitcoin over the years, and also toward cryptocurrencies in general, has been one of unrestrained revulsion. He's called it "rat poison," and said that he wouldn't buy all the Bitcoin in the world, even for a rock-bottom price of $25, because "it isn't going to do anything." He sees all crypto investments as being on track for catastrophe, a view his longtime friend and investing partner Charlie Munger seemed to share.
So he probably won't be buying it right now -- or ever. But if he did, he'd probably opt to hold it forever, much like he prefers to do with most of his investments, seeking to accrue an asset's compounding value over time. Bitcoin is a good asset for holding forever -- and therein lies the reason that Buffett is missing out on a great investment, despite it having a lot of qualities that he usually says he likes.
Thanks to Bitcoin's halving schedule, which is the rough timeline for when the difficulty of mining it increases relative to the reward produced, it has a built-in slowing supply growth. There can only be 21 million Bitcoins in existence, ever, as a result of the hard limits encoded into its protocol (about 19.8 million already are in circulation). So, even if there is a constant level of demand for the coin, given the constraint on supply, its price will rise over time.
Let's think about the implications of that a bit more closely to address one of Buffett's key criticisms, which is that he'd need to find someone to sell Bitcoin to at a higher price than the one at which he purchased it.
Remember, Buffett said he wouldn't buy all the Bitcoin in the world for $25. But he'll never get that opportunity.
There's a legion of Bitcoin fanatics out there who would be backing up the truck to buy it at prices much, much higher than that. One of them is Michael Saylor, the founder and executive chairman of MicroStrategy. His company just purchased $742 million in Bitcoin on Feb. 10, giving it a hoard of coins that's now close to $32 billion.
Saylor isn't the only Bitcoin evangelist willing to make billions in purchases. Nor are all of the coin's boosters as well-funded. The larger point here is that Buffett's concern that there won't be anyone willing to buy the coin if he were to buy it is simply untrue.
It doesn't really matter if Bitcoin, as Buffett said, "isn't going to do anything" -- it's become an accepted store of value that can be transferred at a price from one holder to another. The social consensus, as resistant to traditional value investing valuation methods as it may be, is that it's a brand with a lot of value. That's exactly the kind of economic moat Buffett seeks as part of his quest to identify companies with a competitive advantage. And there are only going to be more holders of the coin over time, now that it's established, so the long-term picture is even better than what the halvings alone might imply.
You can still buy it even if Buffett wouldn't
There's no chance that Buffett will find the arguments presented above to be persuasive. There's also no way to push back against his implied resistance to buying an asset that he isn't comfortable with determining the intrinsic value of. If you'd made your career on crafting careful valuations and buying assets you knew to be cheaper than their real value, you'd be the same way. But that doesn't mean that you need to follow his lead here.
Buying Bitcoin is a great way to build some inflation resistance into your portfolio. It can't simply be printed by any actor, so its value in terms of purchasing power should hold up nicely. Plus, if you're willing to hold on to it for a very long time, you'll likely see its price increase significantly as well.
If you're feeling a Buffett-like concern that the coin's price is elevated right now, have no fear. You'll only need to exercise a bit of Buffett's legendary patience and wait calmly for the price to fall back down to a level that's more appealing to you, which could easily happen within the next few years.
