Should You Invest in Bitcoin? Here's What Warren Buffett Thinks

Buffett says cryptos are just going to sit there and won't multiply.

Billionaire business magnate Warren Buffett is not a big fan of Bitcoin (BTC). In fact, he famously told reporters years ago that it's "probably rat poison squared." He's been more circumspect in recent years, and refused to be drawn on his views at his company Berkshire Hathaway's annual meeting last year. That didn't stop his second in command Charlie Munger telling attendees cryptocurrency was "disgusting and contrary to the interests of civilization.”

Why Buffett isn't a Bitcoin believer

Buffett's main concerns about Bitcoin are that it has no intrinsic value and it doesn't produce anything. He's not a fan of gold for similar reasons. Buffett likes assets like farms, businesses, or real estate that generate income in and of themselves. He calls them "commercial cows" that aren't valued as a medium of exchange, but by their ability to produce milk.

He told CNBC in 2018, "If you and I buy various cryptocurrencies, they're not going to multiply. There are not going to be a bunch of rabbits sitting there in front of us. They're just gonna sit there. And I gotta hope next time you get more excited after I've bought it from you and then I'll get more excited and buy it from you."

Several of Bitcoin's biggest critics agree with Buffett. The argument is that the only reason Bitcoin increases in value is that people are speculating on being able to sell it to someone else for a profit. This is why many warn that the cryptocurrency industry is a bubble that's doomed to burst.

Bitcoin enthusiasts disagree, pointing to the leading crypto's utility as a form of payment or store of value. They also argue that its scarcity -- only 21 million will ever be mined -- makes it valuable. Scarcity is one of the characteristics of a useful currency.

Didn't recent headlines say Buffett changed his mind?

They did. But those stories were a bit exaggerated. Buffett's company, Berkshire Hathaway, invested in a Brazilian fintech company called Nubank. But Bitcoin only makes up a very small part of Nubank's business. And Nubank only makes up a very small percentage of Berkshire Hathaway's investment portfolio.

In fact, there are a couple of businesses in Berkshire Hathaway's portfolio with slight crypto connections. But this doesn't reflect any big U-turn on Buffett's part. It's just that Berkshire Hathaway invests in several major financial institutions. And the rise of cryptocurrency means some of those institutions have now opened the door -- albeit very slightly -- to crypto.

Should you buy Bitcoin?

Buffett is a highly successful investor and it's wise to take note of his concerns. Cryptocurrency is a relatively new and unregulated industry and we don't know what will happen. Bitcoin could become the digital currency of the future, but it may not. It certainly has a lot of hurdles to clear before this happens. This uncertainty makes it a risky investment.

This is why the golden rule of crypto investing is to only spend money you can afford to lose. That way if Buffett is right and the whole market collapses completely, it will be disappointing but not disastrous for your finances. As we've seen in recent years, Bitcoin's price is extremely volatile and can lose 50% in a matter of months. As a new crypto investor, you need to be prepared for what can be a rollercoaster ride.

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Another reason Buffett won't buy Bitcoin is that he only invests in things he understands. This is sound logic for any investor. If you decide to invest in Bitcoin, make sure you understand the basics of blockchain, the main risks involved in crypto investing, and the factors that might impact Bitcoin's performance long term. Don't buy Bitcoin because other people are doing it -- take time to research the industry for yourself and make your own decisions.

In addition to understanding Bitcoin, the decision to buy has a lot to do with your own personal financial situation. If you're not on top of other financial goals such as building up your emergency fund or paying down debt, focus on these things first. High-risk investments shouldn't come at the expense of the foundations that will give you financial security in the future.