His argument (that articles priced in bitcoin change their priced based on the value of a fiat currency such as USD) is valid as a qualitative judgement of bitcoin's utility as a currency, but isn't really a valid test of what is or isn't a currency.
Case in point: The Zimbabwean dollar remained a currency through its hyperinflation period, and is still considered a currency (however useless) even though it is no longer the official currency of Zimbabwe. Now that Zimbabwe officially accepts relatively stable foreign currencies, prices of goods have stabilised in that country.
The Zimbabwean dollar analogy is appropriate. Throughout its wild swings and hyperinflation, it was backed by a government. Bitcoin is backed by nothing at all.
How do you establish a new currency? Well it is easy, you take control over some area of land, by military force or by treaty with the present occupiers of it, then you declare that the people living there need to pay you taxes, then you decide what to accept those taxes in. And that's what it means for a government to "back" a currency.
Considering all of the uproar caused by the Newsweek article, if people knowing you have bitcoins puts you in danger, then I'd say it's not a currency I want anything to do with.
Yeah, if everyone knew I had £1,000,000,000.00 hidden under my mattress (and some mattress that would be), then I imagine my life might be under a little more threat than otherwise too.
Err, it is widely known, google "world's richest people". The difference is, as your sibling post pointed out, those people don't have it hidden under a mattress.
Fiat is only "backed by government" in the sense that you're forced to obtain it to pay debts and taxes. Other than that, the Fed can print more to prevent deflation and the Government can act politically to try and stem inflation. There are limits to that control.
Does Bitcoin meeting a dictionary definition of a currency (that is being a medium of exchange) really matter given his actual point (which you've clearly understood)?
Also, if your defence of Bitcoin as a currency is to compare it to the Zimbabwean Dollar (a currency ridiculed and later abandoned) then is it OK if I ever need a lawyer that I pass on you and go to the next guy? ;-)
His primary point of view is making money. If I can't figure out how to make money on something, I will dismiss it. This is likely what he is doing ATM, but not a good assumption moving forward.
I don't think he's dismissing it for all time, he's just raising a valid point about it as it stands right now.
I don't read what he's saying as anti-Bitcoin per se, he's just saying that right now the massive variability around it means that it's not really a functional currency. That's a valid view and not one he's alone in holding - most economists, hell most people, whether they're pro or anti-Bitcoin will accept that the current fluctuations are problematic when it comes to day to day use.
Whether it's a currency is a separate discussion from whether it has value.
Currencies have value based on the stability of the government, how many goods are priced in that currency, the GDP and trade balance of the country, etc. I'd guess that Buffet is confident in his ability to measure the value of a currency.
Bitcoin is not a currency. I'd bet that Buffet doesn't feel confident about measuring the value of bitcoin.
I think you may have gotten it the other way around - Buffet doesn't feel confident about measuring/guestimating the value of bitcoins, and so he doesn't consider it a currency. A while ago, i read that Buffet's investment strategy is to find companies/stock that is undervalued, and buy it. That means his mindset is that any investment must be made by first making value judgements. In the case of bitcoins, he must be judging the volatility of bitcoins is way too high, and that investing in it isn't a good return on investment.
Bitcoin is not bullion. Bitcoin is not bank notes. Bitcoin is not fiat currency. Bitcoin is something new.
In this case, when Buffett said that bitcoin is not currency, I think he specifically meant that bitcoin is not fiat currency, or any other type of currency where the method of measuring value is well understood.
The main idea behind value investing, as far as I can tell, is to buy things that are being sold for much less than their intrinsic value. If you can't determine the intrinsic value, then on what basis would you invest?
Not that bitcoin doesn't have value - it's just that for someone that practices value investing like Buffett, there's not enough information to decide to invest.
If I had 30 million British pennies it wouldn't be legal tender, because nobody is required to accept that volume by law. Does that mean my 30 million pennies aren't currency?
That is not what legal tender means. Legal tender means that the form of payment is a legally accepted option for extinguishing a debt.
If you owed someone a debt of 30,000 British pounds, you could repay that debt with the pennies, and they would have to accept it. So pennies are both a legal tender and a currency in that case.
Pennies are only legal tender for amounts not exceeding 20p
edit: Also, as the link makes clear, you don't have to accept them even below 20p. All that legal tender means is:
> that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender. It does not mean that any ordinary transaction has to take place in legal tender or only within the amount denominated by the legislation
I did not realize there was a limitation on Pennies as legal tender. Good to know.
However, your second point agrees with what I was trying to say. The fact that a business does not accept change below a certain amount has nothing to do with whether a denomination is legal tender or not. Legal tender only has to do with cancelling out or paying debts.
From the child post:
>>Yup, one of the common misconceptions about money. There's also no legal requirement to give change.
This also has nothing to do with whether a coin/denomination is legal tender or not.
UK pennies are either bronze or copper plated steel. Bronze pennies are worth more than a penny, so paying someone with 30,000 pennies would give them some value of scrap metal. (If they were prepared to break any English law about destroying coin).
So is the Somali Shilling no longer a currency? People use it to engage in commerce and settle debts, but the government that issued it doesn't exist anymore.
At this point I'm reasonably sure there is not enough consensus on the interpretation of the word "currency" to make any meaningful statements about what is or is not one. And the same goes for many other words that get thrown around in these kinds of discussions.
I'm sure there are lots of people who feel that they know the "correct" definition, many with a compelling justification for its validity, but without consensus the word is little more than a rhetorical value judgement.
If people want to have meaningful discussions about new topics which fall outside the established semantic shorthands of past discussion, it generally better to avoid those words entirely.
There are lots of unambiguous claims one can make about Bitcoin, and I really wish people would talk in terms of those, instead of endlessly arguing about what names we're allowed to call it.
Just after the first world word, cigarettes were used as currency in Germany. Currency is simply anything that is accepted as a medium of exchange. That's all what makes currency a currency - doesn't matter if someone doesn't like even for (supposedly) good reasons. :)
Bitcoin isn't a currency by most textbook definitions. As Bitcoin is now, it will never replace fiat currencies because it is not a stable store of value (among other reasons). For now, Bitcoin is just another way to send fiat and something of an investment.
So Bitcoin fanatics who believe Bitcoin will replace fiat are wrong - unless they're willing to accept major changes to the system that go against their usual beliefs. (And even then, I doubt many governments would sit idly by, for good reason.) But for practical people who don't want to deal with buyer fraud, exorbitant fees, and lack-of-privacy, Bitcoin is great.
Buffett may be a killjoy and trying to preserve the current system which tends to benefit the wealthy and well-connected. I'd guess he probably has a lot of stake in that. But he is correct for now.
The concept of a cryptocurrency subsumes traditional currency. You cannot just say, "bitcoin is not a currency". Well of course it isn't! It's an entirely different animal.
It would be like saying the Internet is not a phone system.
I think the main thing is that he's unsure what the value of bitcoin is. The value of a currency is pretty well understood at this point.
There is still a lot of uncertainty in assessing the value of bitcoin. Is it more like bullion? Currency? Tulip bulbs? The answer is like you said, it's something new, but it's not clear yet how to properly value that. If you don't fully understand where the value comes from, then it's safest to not invest.
When I was a kid on the beach, my cousin and I played a game. He collected wet sand and I collected dry sand. We were building separate castles (true story) and we exchanged our sand by trading shells.
In that moment, shells were a currency. It doesn't matter that no adults on the beach would accept the shells as payment for their Coke or that shells aren't legally endorsed by a government.
If we played this game today, we would have our phones out and trade our wares in bitcoin and it too would be a currency. Whether or not it's a good or reliable or sustainable currency is a totally different matter.
Obviously it depends how you define 'currency'. Dictionary.com has at it's first meaning "something that is used as a medium of exchange" as it's first definition, for which bitcoin qualifies. From that point of view it is in some ways better than USD as there is less friction for international transfers.
In other ways it's different - most currencies are backed and regulated by governments. Though things like cigarettes have been used as currency in prisons. I guess the test is whether you can go buy stuff with the thing in which case bitcoin qualifies while gold does not.
The question of what units you use to price future transactions is interesting and more what Buffett is talking about. Like if I'm going to offer to sell you some oil next month I'll probably price it in $usd as that's conventional, and almost certainly not in bitcoin as who knows what it'll be worth in a months time. You could argue though that we could do with some other unit to price contracts, say something like average annual US wage divided by something, that would not be change value much with inflation in the way that fiat currencies do, so you could use it for say pension payments and say in 50 years we'll pay 0.5 average wages or some such which is kind of what you want rather than saying us$40k - who knows what that will buy in 50 years.
Buffet IMO gets way too much credit for what he achieved.
AFAIK his holdings in 2008 got bailed out, saving his financial empire from destruction.
Frankly, I don't care what Buffet or Soros say and I don't see how they could have earned the money if not with corruption, insider trading, you name it ...
Very unlike start-up founders where you exactly know why they got the money...
Buffett did not get bailed out. He was a small part of the effort to prevent a financial collapse.
Buffett is a long term investor. Soros is a currency speculator who sometimes manipulates markets to his own advantage. Could not be more different in terms of their methods. That said Soros has repeatedly proposed simple legal changes to put him and his kind out of business, but while it's legal and profitable to do what he does, he does it.
I have respect for people who can find the "loopholes" in the system, exploit it, but also work to close it. This is a process in which a selfish individual can slowly improve the overall system, while not having to behave altruistically.
specifically buffet has made a career of acquistions of medium and small family businesses which are being sold at distressed prices because of estate taxes.
Moreover Berkshire Hathaway is in the insurance business, and life insurance is a way of circumventing the estate tax.
Not surprisingly, buffet is an advocate of estate taxes.
As for Soros, he is well known for manipulating the price of the pound. It's often lauded as a 'brilliant move' but the net effect of what he did was to screw over poor and middle-class britons.
> "As for Soros, he is well known for manipulating the price of the pound. It's often lauded as a 'brilliant move' but the net effect of what he did was to screw over poor and middle-class britons"
Depends on your POV. The BOE was manipulating its currency by trying to keep it stable and thus overvalued compared to other European currencies. Soros' fund forced the BOE to give up on that endeavour and let the pound find its fair value.
It is hard to say how much of his success is due to his skill and how much of it is survivor bias (with him being the lucky lucky survivor). It's a neat issue.
Buffet is famous for having strong convictions as an investor. He refuses to invest in any business, industry or technology if he doesn't understand how it works.
Though his point about Bitcoin may be valid, we should take it with a grain of salt. Buffet is often predisposed to be standoff-ish about emerging (digital) technology.
> Though his point about Bitcoin may be valid, we should take it with a grain of salt.
Why? His point is valid. Just because something is digital doesn't make it magical and certainly doesn't make it a good idea.
For all intents and purposes, the dollar has been digital for a while. Certainly, there is the analog equivalent and certainly it is centralized, but it's definitely digital.
I want a pure decentralized digital currency as much as the next guy, but bitcoin is definitely not there yet.
What Buffett means by "understands how it works" is to say he understands how the businesses finance works. As an investor in coke, I'm sure he doesn't know much about making the drink.
When WB says he doesn't understand the business of bitcoin, it's because NO ONE understands the business of bitcoin. The market is a wild west of boom and bust every year. Buying bitcoin is speculating, not investing.
A side note: I opened this in a tab along with a number of other things. By the time I got to it, it was some Jim Cramer thing and there were about 30 other things in my history, and I had to come back here to find the original link again. Terrible usability for a news site.
Who cares if it's not a currency or store of value or whatever other economics 101 term? Could it be gone in 10-20 years? Sure. But I doubt it. And if it is, it's because something similar but somehow vastly better comes along (anything only slightly better cannot hope to compete with Bitcoin's network effect and name recognition).
His definition of currency is nonsensical. He gave a valid point, but it has little to do whether a unit is a currency or not. Wasn't he the one who initially called bitcoin "rat's poison"? Wonder who he referred to as "rat" that the bitcoin is poisoning.
That was Charlie Munger, but Bitcoin fans tried to pin it on Buffett too, because he is a billionaire and happened to be in the same room as Munger at the time.
Money is a store of value, a medium of exchange, and a unit of account. Currency is money that is created and backed by the faith and credit of a Government. Central banks control the money supply with the aim of controlling inflation and/or maximizing employment. Bitcoins supply is fixed making it deflationary. Bitcoins function more like a commodity than a currency.
Buffet owns a large stake in Goldman Sachs. Goldman Sachs is one of the big banks who benefit from the current system with the central bank FED. Goldman Sachs is a part owner of the FED who centrally plans the price of new money the interest rate. FED is a private institution owned by the regional federal reserves, the regional federal reserves is in turn owned by the private banks.
Thus the old system fear Bitcoin because with Bitcoin you do not need the banks. With Bitcoin the banks cannot create new debt/credit money through thin air so the banks do not have a special privilege in that system. The banks took Satoshi Nakamotos family home via foreclose and then he created Bitcoin, score settled.
But I would agree Bitcoin is not a currency Bitcoin it is a new economic system where alternative crypto currencies compete with the Central banks FIAT money. Bitcoin also competes with credit cards and payment providers such as Paypal and money wire transfers Credit Union.
> Is there anything about Bitcoin that prevents the existence of fractional reserve?
Fractional reserve itself is not impossible (a bank offering BTC denominated accounts could lend out some of the BTC and not retain enough on hand to cover all deposits.)
But because of the supply characteristics of bitcoin, you'd probably have to charge depositors to store money rather than giving them low-to-zero interest, and give loans at zero-to-low interest compared to typical major fiat currency rates for otherwise similar loans, and then why would depositors pay to store with you rather than keep coins in their own wallet?
So, fractional reserve is possible, but it may be tricky to make a viable business model out of it.
I hope we all realize that 'viable business models' in the world of finance requires merely that they last a few decades. Or at least until the oldest people forgot about the last scam / debt bust / ponzi scheme/ bailout / depression...
Secondly, assuming you're taking on risk, there's no reason at all you wouldn't be paid a fair amount of interest. I believe under the gold standard, government debt had a small but positive rate of interest, and other debt (and equity securities) were riskier and had a higher premium. (Graham and Dodd's Security Analysis)
But I agree that if you are just trying to save money without any risk, like people in the old days who just saved gold coins or paid off their mortgage, that's different and should not earn a lot or any interest. And trust banks at your peril.
Case in point: The Zimbabwean dollar remained a currency through its hyperinflation period, and is still considered a currency (however useless) even though it is no longer the official currency of Zimbabwe. Now that Zimbabwe officially accepts relatively stable foreign currencies, prices of goods have stabilised in that country.