Why Warren Buffet and Peter Schiff are Wrong on Bitcoin

Kyle Torpey @kyletorpey
August 25, 2014 13:00 UTC
Warren Buffet is perhaps the most legendary investor of all time.

Although Warren Buffet and Peter Schiff are called out by name in the title of this article, this piece is really aimed at anyone who claims there is no fundamental value to a bitcoin. These two popular investors disagree on gold and many aspects of the economy, but the one thing they do agree on is the statement that bitcoins have no real value. The crux of their respective arguments comes down to the idea that using Bitcoin as a payment network does not necessarily increase the value of a bitcoin. Money goes into the Bitcoin network and then leaves it on the other side, so these bitcoins should be viewed as nothing more than checks or money orders.


The Importance of the 21 Million Bitcoin Cap

While they may not agree that bitcoins can be money, both Buffet and Schiff understand the value of Bitcoin as a protocol and payment system. Peter Schiff even has Bitcoin as a payment option on his precious metals company’s website. There are plenty of situations where Bitcoin is going to be the only viable option for someone who wants to send a digital payment. Here are just a few examples of where Bitcoin is either the best or only option for a digital transfer of money:

  • Censorship-resistant digital payments (Silk Road, Wikileaks, online gambling, etc.)
  • Digital payments where the customer’s personal information is not handed over to a merchant or 3rd party
  • Cheapest, fastest form of international remittances
  • Merchants offering Bitcoin-only discounts due to the low cost of processing payments
  • Getting money out of a country with harsh economic restrictions (Argentina, Venezuela, etc.)

As Warren Buffet mentioned in his remarks on CNBC, he does not believe these sorts of use cases add any value to bitcoins. The error in his ways was pointed out by Bill Miller on CNBC not long after Buffet’s original comments. When combining the payments innovation with the fact that there are only 21 million bitcoins that will ever exist, you limit access to the network. To use Warren Buffet’s analogy against his own argument, checks and money orders would be rather valuable if there were only 21 million of them that would ever exist. As users enter the Bitcoin payment system, they are increasing the value of all bitcoins in existence. In other words, the Bitcoin market cap has to be large enough to handle all of the transactions that are going through it at any point in time. Bitcoins would have value even in a scenario where no one saw them as money due to the fact that they need to be purchased in order to use the Bitcoin payment network.

Can’t Take the Bitcoins Out of the Bitcoin

Another key point missed by both Schiff and Buffet is that you cannot have the benefits of Bitcoin payments without the bitcoin currency. Schiff has often claimed that a combination of Bitcoin and gold would be interesting, but the problem there is you open yourself up to counterparty risk. As we’ve seen in the past with e-gold and similar projects, operating any kind of digital currency where you store a physical commodity in a vault somewhere is not something governments want to allow. One of the main points of Bitcoin is that it allows you to be your own bank, and you can’t really do that if the gold, dollars, or other assets are stored on the other side of the globe. It’s important to remember that all traditional forms of virtual money are really nothing more than IOUs.

When you hold bitcoins, you’re holding the actual asset on your computer. Any form of money that stores a large amount of gold or fiat currency in a vault somewhere basically has a huge target on its back once people start using that money for the censorship-resistant payments mentioned above. The fact that a vault filled with gold, silver, euros, or anything else would be seized proves that the real value is in the protocol. Any of these “real world” forms of money would only work in a world where financial censorship did not exist. This is why Bitcoin was created in the first place.

Bitcoins are a Commodity

If you’re not sold on the payments argument, then there’s still another aspect of bitcoin where you can find value. At the end of the day, Bitcoin is a distributed ledger with no centralized entity controlling the accounts. The bitcoins on the ledger are nothing more than a unit of account, which means that can be “colored” to represent anything from a house to a US dollar. This ledger is the perfect tool for proving ownership, or even existence, and you have to purchase some bitcoins if you plan to enter some information into the ledger. The limited number of bitcoins on the ledger means there is only so much space or real estate for sale. This fact alone gives a bitcoin value as a commodity, even if no one wants to believe that it can also be money.

What About Inflation Through Altcoins?

One last point that needs to be made when it comes to dismissing the arguments against bitcoin’s fundamental value made by Buffet, Schiff, and others is that altcoins do not equal inflation for the digital currency. For this part of the debate, it’s important to remember the power of the network effect. It’s extremely difficult for any other altcoin to gain a large amount of support due to the extra security and stability that is brought to Bitcoin through network effects. The large amount of hashing power behind Bitcoin mining makes it the most secure ledger powered by proof-of-work on the market, and the amount of liquidity already in the bitcoin market helps bring stability to the price of the digital currency. In other words, people are going to use bitcoins as a commodity on the Bitcoin blockchain because it is the most secure ledger, and individuals are also going to use Bitcoin for payments due to the lower amount of volatility found in the bitcoin currency.

Unless another cryptocurrency is able to attack these two key advantages of Bitcoin, then there is nothing to worry about when it comes to altcoins. It’s also important to remember that Bitcoin can always adopt the features of an altcoin if it is actually a threat to the existing protocol. In a worst case scenario where the Bitcoin protocol is not updated with the features of a new altcoin that would make it more secure and less volatile, everyone can simply move over to that new chain. Having said all that, altcoins still hold a purpose in the cryptocurrency community. They are the perfect test environment for new features that could be added to Bitcoin in the future, and they also offer a casino to gamblers who want to bet on how high an altcoin can go before it crashes back down to reality.

Photo via brewbooks.

Last modified: August 31, 2014 18:55 UTC

Kyle Torpey @kyletorpey

Kyle is a freelance Bitcoin writer and the Marketing Director for Bitcloud. His work has been featured on Business Insider, VICE Motherboard, Let's Talk Bitcoin, and RT's Keiser Report . You can follow him on Twitter (@kyletorpey) or send him an email.