This article is provided for information and education purposes only and is not intended as investment advice. Readers are encouraged to do their own research and consult a professional before making any investment decisions.
Cryptocurrency is about more than just fundamental value, it’s about consumer trends too.
In a recent Fox Business interview, Warren Buffet was critical of Bitcoin, describing it as ‘rat poison squared’ in reference to the cryptocurrency’s rocketing growth in the last five years.
Buffet, the so-called ‘Oracle of Omaha,’ became one of the world’s wealthiest men by relying on his proven investment savvy and acquisition of companies with strong foundations that offered extraordinary compounding growth potential over time - the opposite of what he sees in crypto start-ups that he says have no fundamental value the way stocks do.
He’s not wrong on that count, but I contend that a crucial component of Buffet’s winning fundamentals was his intimate knowledge of consumer demand and behavior. Some of his self-described best acquisitions were companies that commanded a level of consumer demand regardless of price. Buffet understood and was able to predict his customers’ preferences.
In 1972, Blue Chip Investments - a subsidiary of Buffet’s holding company Berkshire Hathaway - paid 25 million dollars to acquire See’s Candies. The small confectionery business only made 2 million dollars yearly profit at the time but has since paid out 1.65 billion dollars in profits over the last 40 years. It is Buffet’s most profitable ROI acquisition to date.
Amazingly, See’s Candies annual production has only doubled in that time. The extraordinary profits came from steady increases in the per-pound candy price that were much higher than the rate of inflation - and greater than what most others would have dared attempt.
Buffet recognized that See’s Candies’ established brand and known quality, coupled with his consumers’ desire for quality ‘sweet things’, would be enough to convince customers to pay the higher prices. These are the types of qualities that Buffet apparently doesn’t see in today’s crypto projects.
More recently Buffet’s Berkshire Hathaway made Apple shares their second largest position, and today own some 28 billion dollars' worth of the stock. Buffet made note of the psychological lock-in and brand loyalty customers had to Apple’s brand and quality. In an industry of high end products catering to the desires of consumers who are desperate to have the latest and greatest communication technology at their fingertips, Apple’s customers are prepared to pay whatever it costs to have those products.
Admittedly, businesses like See’s and Apple with track records of success and brand loyalty do not yet exist in the cryptocurrency sphere. The industry is nearly entirely driven by speculation, rather than present fundamental value — which makes it difficult to assess actual value and prevents coins and companies from meeting Buffet’s rigorous investing requirements. But that is not to say that the industry will not mature.
An industry shift from speculation-driven to value-creation economies on blockchain will see capital flight towards quality — toward sustainable projects backed by strong and measurable fundamentals designed to constrain volatility. These currencies will have the best long-term prospects and will create brand loyalty and ‘economic moats’ that will render Buffet’s criticism obsolete.
But strong sales and brand loyalty derive from being extremely good at providing consumers what they already want. Buffet knew customers wanted ‘sweet things’ and the best mobile phones. Elsewhere, his investing patterns see him investing in consumers’ desire to travel (United, Southwest, Delta and American airlines), communicate (Verizon), send parcels (BNSF Rail Co. & UPS), and buy essential goods (Costco & Walmart) - among others.
But what about the large swathe of consumers who want to enjoy the cutting edge in financial services? To have less friction in value transfer — to have money go mainstream that is faster, more secure, and cheaper to use? Money that disrupts the need for third parties, payment processors, and banks?
Well it turns out Buffet’s Berkshire Hathaway is heavily invested in crypto’s incumbent competitors:
Wells Fargo - 23 billion
Bank of America - 16.5 billion
Goldman Sachs - 2.7 billion
US Bancorp - 3.5 billion
M&T Bank Corp - 850 million
MasterCard - 500m
Visa - 730m
Whether Warren Buffet likes it or not, the demand for a vastly improved and fairer monetary system is real, and it isn’t going to go away. There are teams creating a litany of digital currencies to fill this consumer desire with a myriad of competitive features and financial products that cater to the same trends in consumer preferences that Buffet is usually so good at noticing.
Buffet’s mistake is that he's not thinking about what those trends mean for the future.