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....

[Plus1Entropy]

Bitcoin has dropped by more than that many many times, and has always recovered.

This is the exact characteristic of a bubble. And for every bubble there have been people claiming exactly what you claim.

It always recovers, until it doesn't.

Re:Warren is right and wrong....

[sjames]

The big argument for Bitcoin retaining any value was it's usefulness and eventual use as a daily means of exchanging value. Taking a week for a transaction to clear and stratospheric transaction costs negate that future use. Even a conference for Bitcoin isn't accepting bitcoin now!

Nobody is going to accept transaction costs of more than a few percent for small transactions and nobody is going to sell anything more expensive than a cup of coffee without using an escrow and waiting until the transfer to that escrow clears before they hand over the product or service. That pretty much kills it as a means of value exchange except as a last resort.

The final nail in the coffin, it is just as traceable as a credit card or bank transfer. The people who touted it as being as anonymous as cash have been proven wrong.

Given that, what is the new theory for it retaining any value at all? It IS a fiat currency. The bit of digital data and the whole blockchain carry no intrinsic value outside of the value exchange, just like any fiat currency. If that bit of data represents anything at all, it represents the burned coal that produced the power to run the mining machine. How valuable do you suppose already burned coal is?

Like most modern financial instruments, when the music stops, a very few will make some money and a bunch of people will find no chair.

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.

Re:The guy is a moron.

[hey!]

Hmm. Whose investment advice should I take, Warren Buffet's or Anonymous Coward's?

Re:The Bitcoin challenge

[phantomfive]

Don't know about that, but I sure wish I had ignored the nay-sayers on Slashdot a few years back when you could still mine bitcoin on the CPU. It would have been easy, it would have been fun, but I listened to too many negative people and lost out. Oh well.

Tulips...

[gurps_npc]

Bitcoin is another tulips. Some cryptocurrency will always have value, just as tulips still sell for as much as $10. But they once sold for literally 10x the annual income of a skilled craftsmen.

My personal favorite is the wikipedia's page list of what was exchanged once for a single tulip bulb, which included (among other things) four tun of beer and two hogshead of wine AND a silver cup to drink it (1 hogshead = 79 gallons, 4 hogshead = 1 tun, so clearly a beer lover).

A mania is basically when non-professionals enter the market for speculative purposes, rather than because they want/need the core item.

This is clearly happening with the cryptocurrencies. The only question is, what will their real value end up after the mania has ended.

Why should we listen to Warren Buffett?

[PopeRatzo]

I mean, if he's so smart, why ain't he rich?

Re:The Bitcoin challenge

[SirSlud]

But if you were sane, you'd have cashed out by now. Or if it took nothing to get, you'd ride it until after it crashes. Basically, there's no alternate universe that proves you made X dollars by doing the other thing, so why bother? The only people I've known who've held alt coins told me how much they've made while they were still holding. I've yet to meet a single person who can show me the tens of thousands they made sitting in their bank accounts right now. (Not to say they don't exist, but people also win lotteries, doesn't mean I feel bad for not playing.)

Re: The guy is a moron.

[PopeRatzo]

#Confusing Jimmy Buffett, country music artist, with Warren Buffett, famed investor and said to be the 2nd richest man in the world.

So that's his father?