Warren Buffett Predicts 'Bad Ending' for Cryptocurrencies (cnbc.com)

"97% of all bitcoins are held by 4% of addresses," reports Credit Suisse (in an article cited by Slashdot reader CaptainDork). And elsewhere this week, Warren Buffett told CNBC that speculation in bitcoin and other cryptocurrencies "will have a bad ending," adding that looking out five years he'd gladly bet against all of the cryptocurrencies.

Meanwhile, CNBC senior analyst Ron Insana has his own skepticism: I am predisposed to view them as just speculative tokens in a cryptocurrency bubble that has inflated more quickly than any other in financial market history. Admittedly I'm green with envy for failing to foresee the explosive rally in the price of bitcoin when it was first brought to my attention several years ago. Having said that, there are many things I find quite ironic about how bitcoin and other "cryptos" are described. First, they are largely denominated, or discussed, in U.S. dollar terms... If the dollar is archaic, as the crypto-enthusiasts believe, why not speak only in crypto-terms...?

It's much easier to buy and sell dollars, stocks or commodities than it is to trade bitcoin and its brethren. The conversion of one crypto to another is relatively easy on these embryonic exchanges. But getting your digital wealth converted into cold hard cash is more problematic... And while the growth has been impressive, it remains very difficult to walk into any establishment and exchange a digital token for goods or services.
The article notes that the U.S. dollar still accounts for 65% of all global economic transactions, due to its status as the world's reserve currency, and concludes that "The adoption of cryptocurrencies as a global source of funds has a long way to go before staking a claim to the world's economy."

Comments

Warren is right and wrong....

[MikeDataLink]

He's right in the fact that this is likely a bubble. It will likely correct. I highly doubt bitcoin will ever return to zero (unless there is a nuclear war and then so will the dollar). Every market corrects, even the stock market.

He's wrong in the fact that he thinks of bitcoin as a fiat currency. Its not and never will be. Bitcoin will be like diamonds in the regard that it will carry a constantly changing value. Bitcoin although called a crypto-"currency" should be considered a crypto-"stock".

Re:Warren is right and wrong....

[gravewax]

Cryptos in general might not return to zero, however I would think Bitcoin will. It just has too many basic flaws, once its bubble pops I think it should completely collapse, it may or may not be replaced with something similar (but without the gigantic fucking flaws) but that is another question.

Re:Warren is right and wrong....

[Anonymous Coward]

I am amazed how much the Bitcoin evangelists harp on the 21M limit, given the infinite supply of altcoins that are not any worse, and sometimes better (faster transactions/lower power consumption per transaction/etc).

Re:Warren is right and wrong....

[inking]

Why would you read the white papers? The price in USD is the only thing that speculators care about and it is not determined by any technical aspects of the currency.

Re: Warren is right and wrong....

[Koby77]

The gold standard has a problem in that money is, at its core, a record-keeping system for un-returned favors. By backing a unit of money with a particular unit of gold (or any other commodity) then you limit the maximum size of the amount of un-returned favors that you can track. If an economy that uses this commodity-backed currency generates more work, or more products than this maximum size, then there will be a currency shortage, thereby preventing some transactions. BTC arguably is a hybrid system that is not limited by a commodity, yet is still protected like gold from the introduction of arbitrary amounts of currency from potentially un-deserving sources (banks, government, counterfeiters).

I'm not saying that a hybrid system such as BTC is superior (although it may be, especially if you don't trust the government or its deficit spending), just that there was a somewhat legitimate reason for switching from a gold standard to fiat money (commodity limitation), and that BTC doesn't just replicate a commodity-backed money system.

Re:Warren is right and wrong....

[tlhIngan]

People will buy them just because they can't be printed like the dollar is to infinity.

In other words, stall out the economy.

You want to know why every country moved away from the gold standard? Because it turns out, your economy is limited by how much gold you can find. Find no gold? Well, you economy will stagnate (not a good thing). Find a ton of gold? Well, your economy booms (again, not a good thing).

Say you were paid 1 oz of gold a month for your work. Well, what happens if the company can't get you 1oz of gold? Let's say they can get half an ounce. So you work half the month. But you still have to pay for all your stuff - do you buy half a month's worth of food and starve half a month? Or do you have to search for short term work to make up the missing half an ounce? Perhaps next month, they have an ounce and a half, and let you work 50% more to get it - do you? This uncertainty is what screws up economies.

Going from boom to bust dependent on how much you can mine turns out to destabilize economies. That's why every economy floats their currency (i.e., fiat). Economies in the past were fine - there was lots of gold easily available, and thus the economic output of a country wasn't really limited.

Bitcoin with its fixed supply seems like a great idea, but you then realize it's a static economy. It cannot grow. And economies need to grow. If you have a baby, you need money to pay for its needs. But in a static economy, you can't - you're stuck with what you're earning. You cannot earn more because the economy cannot support your added output - i.e., you work more, and are thus paid less per unit to keep your income the same, keeping the economy static.

As people join the economy (after all, there are people who don't use bitcoin), demand for bitcoins go up, creating an even worse situation - a deflationary one, where a bitcoin today is worth more tomorrow because more people want it. Or, put another way, you can put 8 hours of work today for me, but I won't ask you do that, because tomorrow, it will cost me less bitcoin for those same 8 hours because they're worth more. Deflationary economies can lead to complete economic stall - if you're getting richer by the day, why would you buy today what is cheaper tomorrow? (This is partly the reason why the Great Depression was as long and as hard as it was - yes, being on gold also hurts).

So inflation it is. But not too much - you destabilize the economy if there's too much - what was affordable today, is out of reach tomorrow (see hyperinflaction). You want to add just enough to match growth in the economy. In a trading world, you can benefit as well - print a bit more cash and devalue your currency making your country cheaper to buy from, hopefully increasing economic output (people are buying your stuff!), but don't grow too fast because then your currency goes up and people stop buying.

Bitcoin is like Wikipedia. Both are experiments that have or are going to show what everyone already knows, just taught to the next generation who always never sees history repeat itself. (Wikipedia is a great example of communism as government, and the whole "every animal is equal, but some are more equal than others" conclusion of Animal Farm).

The only good news is that Bitcoin is at least unlikely to affect the economy too badly, so it's only those heavily leveraged on it will suffer. So unlike the lessons we all had to learn during the Great Depression about economic growth, the actual scope of losses will likely just be a blip.

The BitCoin Religion?

[asylumx]

What is it about Bitcoin that makes people throw logic completely out the window? It's a really obvious bubble, and in many ways worse than most bubbles because there is literally nothing of value underneath it all. For example the housing bubble(s) (plural because it's pretty cyclical, seems like we're on the up-rise of another one now) -- at least when it pops, you have land & structures to show for it. Did you pay too much for that at the top of the bubble? Yes, but you can still turn those into income to help cut your losses. Stock bubbles -- same thing, history has shown that if you play the long game, the bubbles and their popping aren't really as devastating as they seem.

I'm not sure -- did people behave like this when the beanie baby craze was going on in the 90s? Did they react with insults and call you stupid if you tried to point out that it's a bubble? I knew lots of people who were in that bubble, and none of them are rich now -- do YOU know any beanie baby millionaires? Possibly the CEO of Ty...

So Bitcoin is obviously a pure speculation market and has no intrinsic value -- what scares me more is how defensive people get when you say that. Look at the above comments for examples, there are plenty!

My advice to BTC prospectors: Get out now. If you got into BTC early, great -- you should be able to turn that into a ton of spendable/investable cash! "But won't it cause a crash if everyone gets out now?" you ask -- possibly, but first of all it's better to be the cause of the crash by protecting yourself than the victim of the crash by waiting too long. Also, since 97% of BTC are held by a few people, the crash isn't likely unless those 4% start selling off, too...