Berkshire Hathaway 2018 Annual Meeting Audience Question # 40

Why Warren said cryptocurrencies are a bubble

Warren Buffett:

Becky?

Becky Quick:

This question comes from Vlad Koptev in Ukraine. He says, “Capitalization of cryptocurrency has approached that of Berkshire and Apple last year. And clearly the idea behind crypto will affect conventional banking groups where Berkshire is a shareholder. You always say you didn’t go into too much detail to obtain an understanding on cryptocurrencies. So what factors caused you to say that it’s a bubble?”

Warren Buffett:

Well, generally non-productive assets remain not only… if you’d bought gold at the time of Christ and you figured the compound rate on it, you know, it may be a couple tenths of 1 percent.

It essentially is not going to deliver anything other than supposed scarcity, you know, because they’ll only… you can only mine so many. But so what? I mean, what does it produce itself?

You know, the check is a wonderful idea. Just imagine how the world would be without being able to write checks or have wire transfer of funds. But it doesn’t make the check intrinsically itself worth a lot of money.

And if you said you can’t use something called “check” with a little piece of paper you’d do something else to transfer money.

I think that anytime you buy a nonproductive asset you are counting on somebody else later on to buy a nonproductive asset because they think they can sell it to somebody for more money.

And it’s been tried with tulips and it’s been tried. It’s been tried with various things over time.

And it does come to a bad ending.

I mean, having… you have a hard time. You can think of raw land. I mean, the Louisiana Purchase was, say, $15 million for 800,000 or so square miles of land. In fact, you’re sitting on land that came with the Louisiana Purchase.

And so what’d we pay? We paid 20 bucks a square mile. And, you know, 640 acres in a square mile. And you’re down to three cents or something. So that was a pretty good purchase of what was then a nonproductive property. But it’d depend… but it’s very hard. You can buy stamps.

Bill Gross got, you know, collected a wonderful stamp collection. It sold for more money in the end.

But it’s dependent on somebody else wanting to buy, hoping they will sell it for more money and so on.

And in the end you make your money on productive assets. If you buy a farm, you try to estimate what the crops, what amount per acre of soybeans or corn or whatever may be raised, and how much you have to pay the farmer that farms it for you, and what your taxes will be, and various things. And you make a conclusion based on what the asset itself will produce over time. And that’s an investment.

When you buy something because you’re hoping tomorrow morning you’re going to wake up, you know, and the price will be higher, the only reason, you know, you need more people coming into it than are leaving.

And you can get that. And it will feed on itself for a while, and sometimes for a long while, and sometimes to extraordinary numbers. But in the end… but they come to bad endings. And cryptocurrencies will come to bad endings.

And along with the fact that there’s nothing being produced in the way of value from the asset that you also have the problem that it draws in a lot of charlatans and that sort of thing who are trying to create various sorts of exchanges or whatever it may be.

You know, it’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbor’s getting rich buying this stuff that neither one of them understands. It will come to a bad ending.

Charlie?

Charlie Munger:

Well, I like cryptocurrencies a lot less than you do.

And so to me it’s just dementia. And I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide, “I can’t be left out.”

Warren Buffett:

To the extent that this… we are being webcast around the world, I hope some of our stuff doesn’t translate very well, actually.

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