SINGAPORE (Mar 5): What do Warren Buffett, Prince Al-Waleed Talal and Jamie Dimon have in common? Aside from being ludicrously wealthy and respected personalities in the financial world, they are also vocal critics of bitcoin and its crypto cousins. Buffet, probably the most celebrated investor in history, has amassed a personal fortune of US$83 billion ($109.3 billion) through his savvy investments across a multitude of asset classes and businesses. So, I can’t think of a better point of reference when analysing investments in any asset — including, more recently, bitcoin.
Buffett says of bitcoin, “What’s going on will definitely come to a bad ending.” He goes on to say, “If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it, but I would never short a dime’s worth.” Put simply, what he means is that he would be willing to bet that all cryptocurrencies will collapse in five years, but it is dangerous to “short” (bet that the price will fall in the short term) them. As with all bubbles, you never know how big it can get. So, it becomes perilous and possibly costly to bet against the trend in the short term.
To put things in perspective, the market value of all cryptocurrencies (that is, token price multiplied by number of units in the market) is US$433 billion today, after having fallen about 40% from its December 2017 peak. During its peak, the value of cryptocurrencies exceeded Buffett’s flagship company, whose market value is US$500 billion.
While the market cap of cryptocurrencies consists of thousands of listed digital coins from bitcoin to banana coin, Berkshire Hathaway houses hundreds of businesses ranging from railroads to Dairy Queen, which generated US$233 billion in revenue and US$24 billion in net profit as at end-2017. An investor buying one bitcoin (US$11,000), for example, is essentially buying a serial number that has absolutely no underlying value nor can it generate a return unless you are able to sell it at a higher price. The same investment in Berkshire will give an investor exposure to the underlying assets of a diverse range of market-leading businesses of household brands we consume practically every day such as Coca-Cola, McDonald’s, Gillette, Heinz and Duracell. It is quite clear which is the better investment!
Meanwhile, Prince Al-Waleed is arguably the most celebrated investor that hails from the Middle East. His net worth is reported to be around US$20 billion and he is famed for making early investments in the likes of Citigroup, Apple and Twitter. Prince Al-Waleed was quoted in a CNBC interview recently as saying, “I just don’t believe in this bitcoin thing. I think it is going to implode one day. I think it’s Enron in the making.” The prince’s criticism of bitcoin is even more acute than Buffett’s, as he is comparing the crypto to the massive accounting fraud that took Enron, a US energy trading and utilities giant, into bankruptcy in late 2001. As such, he is implying there is a potential fraud in progress.
There is a difference, though. The perpetrators of the US$80 billion Enron fraud were known and finally brought to justice. The identities of the miners and token holders are anonymous. In this sense, if indeed bitcoin and other cryptos are scams, it could be the most brilliant scam in history, as the perpetrators have not broken any laws.
Finally, we come to Dimon, CEO of one of the largest financial institutions in the world, JP Morgan, and regarded as one of the best bankers around today. He was also one of the earliest and most vocal critic of bitcoin. He was quoted as saying, “It won’t end well,” predicting it would eventually “blow up”. “It’s a fraud and worse than tulip bulbs.” His comparison to tulip bulbs refers to a period during the Dutch golden age, when prices of tulip bulbs reached astronomical levels only to collapse in early 1637. He went on to say he would fire any employee trading bitcoin for being “stupid”. Of course, the price of bitcoin was trading around US$3,000 at the time and eventually climbed to a peak of $20,000. The fact that bitcoin reached those heights and is now at US$11,000, still higher than US$3,000, does not necessarily mean his call was wrong, but that his call was too early.
FOMO (fear of missing out) was in full swing last year and is still alive and well in the crypto market today. Soon after Dimon’s warning, China banned trading in cryptocurrencies and I had assumed similar regulations from the West such as the US or Europe would come to pass and cap the rise of bitcoin. Neither has done so. In fact, regulators in the US did the exact opposite by allowing futures trading of bitcoin on the commodities exchange, which was an endorsement of sorts for bitcoin promoters and provided the impetus for further feverish buying.
US regulators have a history of acting retrospectively; they allowed the market for mortgage-backed securities and collaterised debt obligations to balloon unchecked, until they eventually popped in 2008 and triggered the greatest global recession in recent history.
Another case in history with similar exuberance to the current cryptomania was the dotcom bubble of 1997 to 2001, when speculators and investors were buying into technology-related stocks bound for a Nasdaq listing.
At the time, companies without a track record in revenues and earnings could be listed as long as they had a business plan. Again, the US authorities allowed the mania to go on until Nasdaq was pricing stocks at 200 times price-to-earnings ratios.
As an example, Pets.com was a short-lived e-commerce business that sold pet accessories and supplies direct to consumers. It listed on Nasdaq and went into liquidation 268 days later, losing about US$300 million in investor money almost overnight.
When Nasdaq finally crashed, it wiped out US$1.7 trillion in market value and left many investors to pick up the pieces. A chain reaction caused markets across the globe to fall and another US-led global recession ensued.
I am not suggesting that the crypto market poses any systemic risk to the global financial system or that it should even be banned. If regulation is not enacted swiftly, however, this bubble could grow until it eventually bursts. Without regulation in place, cryptocurrency “investors” have no protection from unscrupulous promoters. In the meantime, dark web users could continue to have access to a global digital conduit to launder money quickly and cheaply.
Value investors should heed the words of Buffett, Al-Waleed and Dimon, and focus on economic moats, revenue, earnings, growth and dividends, and leave bitcoin to speculators.
Wan Hazreek Hussain is founder and managing director of Darabif, a burger patty manufacturer for its own brand ‘Daraburgers’ and has investments in various industries including property, oil palm and digital media. The views expressed are his personal views on cryptocurrencies.
