Lately, it seems that everyone has their own opinion about Bitcoin (CRYPTO: BTC)… On the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) this weekend’s annual meeting Charlie Munger proposed his. Not surprisingly, it was salty and worthless. The 97-year-old billionaire and associate of Warren Buffett gave a harsh assessment:
I hate currency, which is so good for kidnappers, extortionists, and so on, and I hate to just shuffle your billions of extra dollars over to someone who has just invented a new financial product.
I think I should humbly say that this whole damn development is disgusting and contrary to the interests of civilization.
Unsurprisingly, someone who was a child during the Great Depression and who is nearly 50 years old by the time the US abandoned the gold standard is not keen on digital currency. Rather than blame this on a generational misunderstanding, let’s look at three things that support Munger’s skepticism.
1. This is a speculative asset.
Bitcoin’s original design limited the amount that could ever be created. A fixed supply changes how people use it – or not. Targeting a certain amount of coins has turned them into a speculative asset. People are ridiculed for not holding on, or, in bitcoin parlance, “hodling.” Terms like diamond hands have become synonymous with those who don’t sell their bitcoin investments. Not only do these people not sell; they also don’t use it as currency. Instead, they plan to sell it to someone else in the distant future for more than they paid. This is the very definition of speculation.
For those who ask the question, “Isn’t that why people keep stocks?” The answer is yes and no. Stock investors may want to sell the stock later at a higher price, but these stocks are a requirement for real cash flows and dividends. This is similar to real estate, where value is (in theory) determined by the property’s ability to generate rent. Bitcoin does not have that kind of cash-generating potential.
2. It is less secure than the current system.
Bitcoin advocates praise its security. Without a digital key, a criminal cannot gain access to funds held in bitcoins. One of Munger’s favorite mental models is to turn the problem around – thinking about it back and forth at the same time. In this case, if one digital key protects all of your bitcoins, the opposite is also true. All your bitcoin can be stolen or lost with a single digital key.
The early bitcoin platform Mt. Gox lost 650,000 coins after being hacked in 2013. He filed for bankruptcy in 2014, freezing hundreds of thousands more coins. There are many stories of owners who lost hundreds of millions of dollars by accidentally throwing away their hard drive with a digital key or forgetting their passwords.
In traditional banking, there is no single password that gives people access to all of their funds. Plus, artificial intelligence and two-factor authentication make it harder to steal a password. A digital key can be the only point of access, but that also makes it a single point of failure. This is taught to be avoided by designers in all fields, physical and digital.
3. The beginning of the end
The argument has been put forward that if someone wanted to ensure that humans would destroy the earth, the best way would be to reinvent bitcoin. This is a dramatic claim, but it is not so outlandish when you put together the energy consumption to mine it, the slowdown in the pace of creation, and the speculative zeal that people have demonstrated over the centuries.
The annual energy consumption of bitcoin mining is already comparable to that of many countries. Environmental groups have calculated that Bitcoin alone could raise global temperatures by 2 degrees by 2050. Even if this is an exaggeration, the amount of energy consumed in the absence of real economic production raises questions about how governments can regulate it in the future. Several countries, including Turkey, have already banned the cryptocurrency due to its lack of central authority. It doesn’t take much imagination to see how others are tackling environmental issues as the frequency and severity of natural disasters continues to deteriorate. Energy consumption will only increase as the rate of creation slows down.
There can only be 21 million bitcoins. The creators programmed the creation rate to double for every 210,000 bitcoins mined. This process is called “halving” and the last time it happened in May 2020. So far, this happens approximately every four years. As a result of the halving last year, the number of mined blocks fell to 6.25 bitcoins. Initially, miners earned 50 bitcoins per block. This limit is one of the reasons speculators are convinced that the digital currency will continue to rise in value over time. So far, they were right.
The stories of people who got rich buying cryptocurrency reflect other bubbles of history. Whether it’s tulips in the 1630s, gold in the 1840s, internet stocks at the turn of the century, or real estate in the 2000s, people just can’t watch others get rich without participation. This combination of jealousy and greed fuels speculation and pushes some towards truly remarkable goals that claim their share of the wealth. There are already Bitcoin mining companies all over the world with cheap electricity. One even recently opened in Siberia. Imagine what people would go to if the price was 10 or 20 times what it is today.
The rest of the story
Of course, for every ten-year-old who says Bitcoin is bad for civilization, there are likely hundreds of thousands of young, naive investors waiting for Bitcoin to go to the moon. Munger’s skepticism is rooted in his centuries of life experience. Ironically, this is the opinion of many who own bitcoin.
Since 2007, they have watched the Federal Reserve backing Wall Street during the financial crisis and watched the money supply grow by more than 100%. This was before the pandemic. Assets have grown in concert, and this generation is likely to want to create wealth of its own. Many people buy Bitcoin not because they are tech savvy, but because they see it as a way to realize the American dream they were raised to. After all, if you constantly see stories of people getting rich in a way that you have access to, it may seem crazy not to try. This is not the case for those who have experienced the pain of financial loss. As Morgan Housel points out in his bestseller The psychology of money: “[P]People do crazy things with money. But nobody’s crazy. “
This article represents the opinion of an author who may disagree with the “official” position of the Motley Fool premium advisory service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.