With a technology as new and controversial as bitcoin, it’s inevitable that some people will resist its implementation. These people are known as no-coiners, and two of the most prominent are Warren Buffett and Nouriel Roubini, a professor at NYU’s Stern School of Business.
Another early, adamant no-coiner was Jamie Dimon, the CEO of JP Morgan. Then he turned on a dime, so to speak, and JP Morgan started investing heavily in bitcoin. They produced an enterprise fork of Ethereum, called Quorum, that many enterprise-grade blockchain companies use as infrastructure. They’ve also since released their own coin.
Why do Buffett and Roubini object to bitcoin? Are their criticisms justified?
Let’s zoom out a little and clarify the distinction between two different types of no-coiners. Broadly, they come in two overlapping varieties: those who don’t own cryptocurrency and aren’t interested in doing so, and those who think crypto is little or nothing more than a hoax and a scam. A lot of journalists are no-coiners of the first variety because they want to keep an unbiased perspective.
Buffett comes under the second rubric—and, as one of America’s most esteemed investors and investment advisors, he at least deserves a fair hearing. A May 2018 CNBC article quotes Buffett as saying, “If you buy something like Bitcoin or cryptocurrency you don’t have anything that is producing anything, you’re just hoping the next guy pays more. You aren’t investing when you do that, you’re speculating.”
Is he right? It’s possible Buffett could be giving great investment advice and that most everyone who gets involved in crypto is just getting duped. However, the situation, in my opinion, is not so cut-and-dried. Cryptocurrency has a very short history. Historical data, which the finance industry relies on when doing analysis, is still fairly sparse in the blockchain and cryptocurrency markets.
Buffett’s comment was made in May 2018, during, although at the tail end of the bitcoin bubble. A lot of people were mesmerized by bitcoin’s rise. Many invested in bitcoin and other crypto hoping to triple their holdings in short order. It was a classic “get rich quick” scheme. What was and continues to go on in crypto looks very much like traditional trading-room floors. It might be objected that when speculators trade commodities, they are trading something “real,” like a shipment of oil or soybeans.
It could also be argued that non-fungible tokens, crypto-collectibles, and cryptocurrency, in general, have no real relationship to physical assets. However, asset-backed tokens representing gold or oil, or security tokens that represent ownership in real estate do, in fact, symbolize physical value. It could also be argued that the difference between speculating in commodities and crypto is not that great, especially in a financial and socioeconomic environment that digital technology has completely transformed.
The Difference Between Speculation And Utility
Buffett’s objections center on the idea that people purchasing bitcoin are doing so purely in the hope of it rising in value. That may be true of some people, but certainly not all. My entry point, like that of most early adopters, was buying bitcoin. The thing is—and I feel this is an important distinction—I didn’t see this as speculation. When I bought bitcoin the first time, early on, I was doing research, just as I did research on other, somewhat related digital realms, such as Second Life or the dark web.
If you spend five cents to buy something online, you’re not thinking of stashing it away because one day it’s going to be worth hundreds of millions of dollars. My approach wasn’t that of a speculator, gambler, or investor. I was buying bitcoin, but I might just as well have been acquiring Second Life Linden dollars, bought on an exchange so I could buy a ticket to go to an in-world Fatboy Slim concert.
I was thinking very much in terms of utility, and in this I’m far from alone in the crypto community, certainly among early adopters. I didn’t buy thinking or hoping the price would go up. I assumed the currency was stable enough or, rather, that it had a stable value in its digital sphere or “world” at that time, which would enable me to do what I wanted to do. I was investing rather than speculating, in Warren Buffett’s sense, and continue to invest when acquiring Decred and similar cryptocurrencies.
Any commodity that rises rapidly in value will attract speculation. But that doesn’t mean bitcoin is only a vehicle for speculation. It’s a real tool with numerous applications.
What Separates A Bitcoin Bubble From Any Other Bubble
While Buffett looks at bitcoin from an investing perspective and, so far, doesn’t see it as a good prospect, Roubini hates the stuff with little of the equanimity that the more revered Buffett, for all his criticism, displays when talking about its risks.
Roubini is a self-proclaimed bitcoin expert who has testified against crypto in Congress. He believes that large token holders, or “whales,” are manipulating the entire crypto market, including, but not limited to, bitcoin. They can do so, he contends, because the caps on these markets are so small. In Roubini’s opinion, “whales” basically pump crypto markets, reap the benefits, and then dump their holdings. Everyone else in the market is at their mercy and left holding the bag. From his perspective, crypto markets are fully centralized and nothing more than scams.
ICO and other crypto scams have undoubtedly taken place. These shouldn’t be swept under the rug, because we need to learn from our mistakes. However, some no-coiners think cryptocurrency itself is a sham. Many feel the same way about blockchain: that it is nothing more than a glorified database. A third group deprecates crypto, but sees value in its underlying blockchain or distributed-ledger technology.
In my opinion, such black-and-white negative stances betray fundamental ignorance. The counter-argument is to point out the similarities between crypto and the traditional system of financial markets. There have been booms and busts since before the emergence of stock exchanges. In boom times, people go a little crazy and, proverbially, fools and their money are soon parted.
Let’s take a historical perspective. Were there stock market bubbles that burst in 2008, 2001, and several other occasions, notably 1929? Certainly, which is to say that there are just as many similarities as differences between the ups and downs of traditional exchanges and crypto bull runs and bear markets.
No-coiners like Nouriel Roubini say, “Cryptocurrency is carefully orchestrated to create a bubble, take advantage of everyone, and steal money.” That’s their perspective: the global scam.
However, it’s hard to call what happened with bitcoin in 2017 a bubble. Bitcoin has had both bull and long bear markets. To take a historical perspective again: those who put substantial money into bitcoin in the early days saw it go from a fraction of a penny to a dollar and made significant gains. In 2017, we saw bitcoin go from $6,000 to $20,000, but something like this had already happened three times before.
Bitcoin is actually on a relatively consistent upward trend. The speculators, who want continually higher valuations, react to downturns by saying, “Oh my god, this is terrible. The whole market is doomed.” People who have been involved in bitcoin for a while believe that it will continue to trend upward in the long run. The actual goal, depending on who you ask, is the creation of a stable global currency or store of value that institutional investors and others trust and rely on to the extent that they’re willing to build other financial products with it. It’s meant to be a global currency that transcends national and corporate bounds and restrictions.
Creating a new system of such scope is a massive undertaking, something bitcoin has already accomplished. Bitcoin has shown there’s a genuine alternative to fiat currency. Then comes the backlash: cryptocurrency is somehow no good as a financial instrument, as a technology, or both. In fact, bitcoin has been in production for ten years and is still going strong. It’s relatively solid. No-coiners may argue that it’s a scam, or a speculative bubble, but ultimately those arguments misrepresent what bitcoin is.
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