Warren Buffett is right about crypto: Investment decisions shouldn’t turn on FOMO

BILLIONAIRE investors Warren Buffett and Charlie Munger have, again, ruffled feathers in the crypto fraternity with their recent criticism of bitcoin and other cryptocurrencies.

If we put aside for a moment their arguments on the utility, or lack thereof, of crypto and blockchain technology, perhaps both sides make a fair point – that is, we should invest in companies and industries only if we know what they are about, and understand the risks we are taking on.

At the Berkshire Hathaway annual shareholders meeting last month, Buffett said he would not take up an offer to buy all the bitcoin in the world for US$25. 

The 91-year-old chairman and chief executive of Berkshire Hathaway, a multinational conglomerate, has for years maintained he does not and will never hold cryptocurrency because it does not, in his opinion, produce anything.

Buffett shared an expansive appraisal on crypto at the Apr 30 meeting, attended by some 40,000 shareholders.

He acknowledged a shift in the public perception on bitcoin, but indicated that his own stance has not shifted.

“Whether it goes up or down in the next year, or 5 or 10 years, I don’t know. But the one thing I’m pretty sure of is that it doesn’t produce anything,” Buffett said. “It’s got a magic to it, and people have attached magic to lots of things.”

Berkshire Hathaway vice-chairman Munger, 98, used stronger words. 

“In my life, I try and avoid things that are stupid, evil and make me look bad in comparison to somebody else… and bitcoin does all three,” he said, referring to how the US looks “foolish” when compared to China, where crypto is banned.

Crypto enthusiasts have hit back, arguing that these long-time investors do not understand the blockchain-based coins.

But so what if they don’t?

Buffett is famous for advocating that investors should invest only in what they know and understand.

Investment decisions shouldn’t turn on FOMO – the fear of missing out.

Crypto bros who understand the risks and see value in crypto opportunities should, by all means, plough their funds into them. But those of us who don’t, are probably better off buying something we can more comprehensively assess.

Buffett has admitted to missing the boat when it came to technologies he didn’t understand.

Google’s co-founders had sought his advice while preparing to go public, but he had passed on an opportunity to invest in the company prior to its initial public offering in 2004.

At Berkshire Hathaway’s 2017 annual shareholders meeting, Buffett said he made the wrong call. “I had plenty of ways to ask questions or anything of the sort and educate myself, but I blew it,” he said.

The danger with crypto, on the other hand, is how many might be throwing money at it without asking questions or anything of the sort. The ease of doing so and the gains others are reaping make it all the more alluring to throw caution to the wind.

Such FOMO characterised the dot-com bubble over 20 years ago. Investors had poured record amounts into Internet-based companies, many of which had no proprietary technology.

The Nasdaq climbed to an all-time high in March 2000. But by the end of 2001, a majority of these dot-com companies had folded while trillions of dollars in investment capital had dried up.

Today’s crypto bullishness bears some resemblance to the dot-com bubble.

We are not likely to arrive at a consensus so soon on where that resemblance stops, but it’s probably best to educate ourselves and not let FOMO take over.