16 ms·

Buffett Says Stock Ownership Became More Attractive With Tax Cut

176 points by rayuela 9y ago

adamnemecek 9y ago
“Now when it happens, or how or anything else, I don’t know”. Oh, ok then.
- deleted 9y ago
  [deleted]
- cjensen 9y ago
  Determining that something is overvalued is vastly easier than determining when the overvaluation ends. I was one of those who saw the housing bubble for what it was in 2003. Among people who saw it, the causes of the bubble and the bubble psychology among buyers was well-understood. I had zero clue as to when or how the housing bubble would end. It lasted far longer than I anticipated. In other words, a smart investor can see when something is priced wrong. But only a foolish investor will tell you when or how the price will correct.
frgtpsswrdlame 9y ago
>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Hmm, in that way you could see it as the market around cryptocurrencies lacking the financial complexity that could bring their volatility back down to more normal levels.
- cma 9y ago
  The difference between a put and a short is a short has unlimited downside (the price you are shorting can go up far more than it can go down). This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s
- elhudy 9y ago
  I thought there are exchanges which allow crypto options trading?
  - pzs 9y ago
    Futures are certainly available. I haven't heard of options yet, but that may just be my ignorance.
    - jabujabu 9y ago
      Bitfinex, Bitmex
      - frgtpsswrdlame 9y ago
        I think the counterparty risk involved in buying a long-dated (and expensive) put from one of those exchanges overwhelms any possible profitability. If Bitcoin really did crash, who's going to pay up for it? Right now there's not a very good answer.
    - vasilipupkin 9y ago
      ledgerx
  - cdjk 9y ago
    Not in the volumes Buffett is interested in. And they are quite sketchy compare to regulated US financial markets.
  - JumpCrisscross 9y ago
    Why would you trust, in the event of a Bitcoin meltdown, which is the case where your put pays off, that those exchanges would be in a position to honor their contracts?
    - elhudy 9y ago
      I'm not sure what you mean. Unless I am completely ignorant of the way financial markets work, the exchange is exchanging between two parties, and skimming off the top. They do not care what the price of Bitcoin is, as long as there is trading volume. They do not lose money in the event of a meltdown. The people selling the put options do.
- panarky 9y ago
  During the 2008 crisis Buffett bought a $5 billion stake in Goldman Sachs. He didn't buy shares on any exchange, he dealt directly with Goldman. Buffett doesn't need complex financial markets because he does custom transactions directly with companies. A Winklevoss could easily sell him a billion-dollar five-year put, but he wouldn't like the price.
  - isolli 9y ago
    I think he would worry more about counterparty risk.
  - JumpCrisscross 9y ago
    > he wouldn't like the price For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model [1]. This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway. I'll use the $14,400 Coinbase price [2] for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site [3] says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% [4]. The real shit show in this example is the rates component. If we use this 57% number [5], the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% [6]. BSM says...$1,037.01. (Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.) Raising our rate to the call money rate [7] we get $792.84 with rates continuing to dominate volatility. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model [2] https://www.coinbase.com/charts https://www.coinbase.com/charts [3] https://bitvol.info https://bitvol.info [4] sqrt([5 x 365] / 252) x 5.21 [5] https://www.bloomberg.com/news/articles/2017-11-09/keynes-worked-out-the-bitcoin-interest-rate-it-s-57 https://www.bloomberg.com/news/articles/2017-11-09/keynes-wo... [6] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [7] https://www.bankrate.com/rates/interest-rates/call-money.aspx https://www.bankrate.com/rates/interest-rates/call-money.asp...
- csomar 9y ago
  I'm pretty sure you can construct that instrument for the right amount. I'm afraid will be exorbitantly high that he'll have to "re-consider" it.
rjromero 9y ago
Buffet and 99% of other traditional investors probably don’t understand p2p decentralization.
- baus 9y ago
  Personally I don't think Buffet is the type to be "blind-sided from rage-jealously," which is part of his success. Given how Berkshire stock is performing as of late, I don't think he has much to be jealous of.
  - deleted 9y ago
    [deleted]
- untog 9y ago
  Tech exceptionalism strikes again! Buffet is a smart man, and I would bet that he could understand P2P decentralisation just fine. It's possible to be smart without being a programmer. But he knows investments a lot better than he knows Bitcoin tech. Why would an in depth knowledge of bitcoin override existing knowledge about investments? The tech of bitcoin certainly does nothing to prevent a bubble, and he's probably seen more bubbles come and go than the rest of us have had hot dinners.
  - avip 9y ago
    Yet easier to be a programmer without being smart.
- bradleyjg 9y ago
  probably blind-sided from the rage/jealousy of missing the crypto boom An 87 year old man that's the third richest person in the US and whose tens of billions of dollars will be given away to charity (not even a charity named after himself) in a few short years when the inevitable happens, is blind-sided from rage/jealousy at having missed out on the crypto boom? Come on, you need a better model of other people.
  - 9y ago
unknown_apostle 9y ago
He's right about the shorting: to short it using futures is, in a way, to side yourself with potential ruin. Only through put options can you safely do this.
- comboy 9y ago
  Can you elaborate? Why shorting wouldn't work?
  - dmm 9y ago
    A short has an unlimited downside. A put contract has a fixed downside, the price of the contract, which is paid regardless of whether you exercise the option or not.
    - imranq 9y ago
      However a put must have an underwriter who must take the risk that it goes to zero
      - pzs 9y ago
        True, yet the downside is still limited. The worst case for the option seller (or writer) is that she has to buy an asset valued at zero for the pre-agreed strike price. That puts a cap on her loss.
    - perseusprime11 9y ago
      Can you explain this further? Is a put contract essentially saying that this stock is not worth it and will lose its value in the next few months?
      - workthrowaway27 9y ago
        A put allows you to sell an asset at a certain price in the future. So, say I bought a put option with a strike price of 10k USD for bitcoin 5 years from now. If in 5 years the price of BTC is less than (10k - the price I paid for the put option) I can buy a BTC for whatever it currently costs, sell it at 10k to whoever took the other side of the option and make a profit. The risk is that if the price of BTC is above 10k, then I'm out the money the put option cost me.
austenallred 9y ago
>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Interesting to think what five year puts on a cryptocurrency would cost. Probably more than Buffett or anyone would want to pay.
MollyR 9y ago
That will only happen if fiat doesn't fail first, and its not looking good for fiat due to inflation and negative interest rates right now.
- meri_dian 9y ago
  What makes you think that?
- nxsynonym 9y ago
  I've seen literally zero evidence that fiat is failing. If you have any, please provide it.
  - koonsolo 9y ago
    This article puts a big question mark of the quantitative easing done in 2008 on the dollar: http://www.heritage.org/monetary-policy/report/quantitative-easing-the-feds-balance-sheet-and-central-bank-insolvency http://www.heritage.org/monetary-policy/report/quantitative-...
deleted 9y ago
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brndnmtthws 9y ago
It's always good to see the same hot takes rehashed over and over on HN. I'm sure Bloomberg appreciates the ad revenue. Buffett (with all due respect, and I have a lot of respect for him) doesn't understand Bitcoin, and doesn't add anything of value to the discussion. He's never been much of a technology investor, so this should surprise no one.
- samfisher83 9y ago
  Crypto currency is an asset. He has bought and sold a lot of assets over time and has done pretty well. Google Tulip mania. The whole point of bitcoin was a form a digital currency. However due to the high transaction fees and volatility you can't really use it for that. I have no idea where it is going, but to dismiss a guy who has experience buying and selling things for a long time seems foolish.
  - vasilipupkin 9y ago
    Buffet has a lot of expertise investing in businesses where cashflows can be analyzed. Not every investment is like that. Where it's not like that, his expertise is less valuable
    - TheAdamAndChe 9y ago
      Yet at the end of the day, Bitcoin is simply a store of value, just like any currency. And Buffet has plenty of experience with handling stores of value. Bitcoin's recent exponential growth screams "bubble" for anyone who knows what to watch for.
      - vasilipupkin 9y ago
        I don't get this whole store of value concept. Nothing is a store of value, all there is is investments with varying levels of risk.
        TheAdamAndChe 9y ago
emag3m 9y ago
I wish he'd be alive long enough to see how wrong he is
deleted 9y ago
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dmichulke 9y ago
There are two types of investors. Those that don't understand cryptocurrencies and just ride the hype train; and those that do. To those that do, some rich guy's opinion doesn't mean a lot. It's just another opinion floating in the infinite opinion space. Authority means nothing to them. To all others: Sell!
- ramblerman 9y ago
  I was an early adopter and proponent of BTC, and have made a nice sum of it. But today I have some serious doubts: 1) What I initially found the best feature of BTC (the finite pool) has turned it into a digital gold, and unusable for real day to day transactions imo. 2) The blockchain is too slow, and too expensive. Now maybe BTC does have a future as digital gold, but not as a medium for transactions in the legal space (imo)
- deadmetheny 9y ago
  I would consider one of the most successful investors of all time to be a bit more than "some rich guy" hawking an opinion. He got rich by making smart long-term investments and watching market trends. Crypto is a foolish long-term investment. Even in the short-term it's akin to gambling.
  - acdha 9y ago
    I don't think that was intended as a description of Buffet but rather describing how people will dismiss his experience. It's almost exactly how people trying to say that insolvient.com was a good buy because The World Has Changed™️ and only old people cared about profitability or, a decade later, that there was no way the real estate market could go down.
- amsilprotag 9y ago
  I'd love to see the results of the following survey given to a representative sample of cryptocurrency investors. 1) If you want to invest in cryptocurrencies, you should understand them. (true/false) 2) Most cryptocurrency investors don't understand cryptocurrencies. (true/false) 3) I understand cryptocurrencies. (true/false) I would guess each question would have 80%+ true responses.
viach 9y ago
Like everything is, including life?
at-fates-hands 9y ago
Wasn't this part of the lure with BTC to begin with? To be decentralized so it would be outside the bounds of manipulation by guys like Buffet?
- slivym 9y ago
  No. Not at all. The theory was to avoid government manipulation. It's actually much more susceptible to market manipulation due to the lack of regulation.
ghostbrainalpha 9y ago
Everything that ends, basically comes to a bad ending. Otherwise it wouldn't have ended.
scottmsul 9y ago
I've heard smart people say bitcoin will plummet because it has no intrinsic value. Well of course it doesn't! It's a currency. Currencies are an abstraction for value. Sure, right now bitcoin is not a good day-to-day currency because of high transaction fees and slow verification speeds. But there are new altcoins that have solved both of these, that exist right now! The real win for cryptocurrencies, in my opinion, is that it's public-key internet money, while debit cards are private-key internet money. With debit cards, you have to give someone your private key (16 digit combo+exp date+security code) in order to transact. Giving away your private key is prone to fraud, and the fraud-protection mechanism is to give a centralized authority access to everything you've ever purchased, and they look for anything "suspicious". On the other hand, with public-key money, when you give someone funds, there's no risk of them exposing you to fraud or unwanted transactions afterwards. Even though I understood the public-key mechanism for bitcoin early on, I didn't realize the full implications for the financial system until recently.
- wildbunny 9y ago
  The easy way to express this is: cryptocurrencies are true, digital cash
  - JumpCrisscross 9y ago
    > cryptocurrencies are true, digital cash I just wired money from my brokerage account to my checking account at a different institution. It happened in thirty minutes and I was charged no fees. Digital cash has been the bulk of cash for many, many years.
    - taway1929293 9y ago
      That meets the /digital/ criteria but not the /cash/ criteria. consider that there are banks and accounts that you can't wire to, or that an account can be frozen. cash & bitcoin don't suffer this. there are a number of desirable properties that bitcoins have, and some downsides as well - digital is only half the equation.
    - 9y ago
nautilus12 9y ago
All i could focus on was the statement increase of 20% and how ambiguous that statement is whether you are referring to the original percentage or a percentage of that percentage (which is what he meant here).
littlestymaar 9y ago
I have a lot of friends investing in crypto-currencies recently, and here's the fun thing: most of them are well aware this is a speculative bubble, but it didn't stop them investing. Quite the opposite actually, they believe this is the beginning of the bubble, and they can make a several hundred percent investment in a short timespan. And they are quite right, in every speculative bubble, no value is ever destroyed, it's merely a transfered from some speculators to others, all they need to do is sell at the right time.
- perseusprime11 9y ago
  A lot of my friends lost money when Tron fell from 20+ cents to 10 cents. Beware of speculation. There will always be winners and losers and reading the bots on Reddit is not helping this bubble either.
- JumpCrisscross 9y ago
  > in every speculative bubble, no value is ever destroyed Public trust is destroyed by bubbles. That takes time to rebuild. In the meantime, it leaks into the political system. I was in an Uber the day Bitcoin hit $19,000. My driver was proud he'd just taken out a second line on his house to buy. There is a non-negligible chance he, and people like him, will end up on the public balance sheet as a result of these wealth transfers.
  - littlestymaar 9y ago
    That's right, problems occur when people bet more that what they can lose. I'm convinced that's why the regulators don't like crypto-currencies. Not because they will lose their power, like some people seams to believe, but because they don't want a huge number of ruined people when the bubble collapses.
- ataturk 9y ago
  You just described how every intelligent person gets scammed everywhere--"I'm too smart to fall for their tricks, I'll know when to sell just at the right time!" No, you won't. Because you don't know the scam, you just think you know. It's not a coincidence that hundreds of Wall Street con men jumped into the crypto space in the past couple of years. You aren't going to outwit them. They know exactly how to operate their scams in a completely unregulated environment.
tromp 9y ago
I believe that 98% of the roughly 1400 coins listed on coinmarketcap will come to a bad ending, because the vast majority cannot has no good enough reason to exist. That includes all bitcoin clones with a few parameters tweaked and a different hash flavor of the hashcash PoW. Bitcoin continues to evolve, and will find more use cases with 2nd layer scaling solutions like Lightning. Ethereum continues to experiment with proof of stake and sharding solutions. Both will explore ways to increase privacy, hopefully in ways that do not impair scaleability. Those two are the only ones I am reasonably sure will still list near the top, 10 years from now.
- sfifs 9y ago
  You're betting around 30 will survive? What would be the reason for survival of so many?
  - saosebastiao 9y ago
    If I'm an american and want to buy something in china, I need to pay renminbi. Typically this happens via some proxy financial institution, who will process the transaction through the various distributed global currency markets. The same could be true in the future of crypto, although national borders may not be the defining trait, but rather the relative properties of a currency and preferences of the sender or recipient. There are enough nuances between crytpocurrencies that there is room for more than a handful.
  - tromp 9y ago
    Many coin founders profit handsomely from their creation, often holding an obscene fraction of coins, or in some cases, gaining ever more through certain gimmicks. They can afford to heavily market their coin and fund further development, even if of technically questionable nature.
  - realusername 9y ago
    There's a lot of truly revolutionary ideas with some of them, the currency aspect is only the absolute top of the iceberg. I could clearly see 20 to 30 ones which are not just cheap copies of other ones.
perseusprime11 9y ago
I think except for Bitcoin, most altcoins have no infrastructure or developers working on it and hence doomed to fail. There is definitely a bubble and individual investors not knowing how to time the market will fail and lose lots of their hard earned money.
api 9y ago
Cryptocurrency is currently in the silly phase of bubble. It looks exactly like the peak of dot.com mania. A crash is coming fairly soon. My top end estimate for time remaining would be a year, but I'd warn anyone contemplating a shorting strategy that bubbles have a way of going far higher than anyone can predict. Many people lost serious money trying to short dot.com and housing. Still we are definitely in the fragile tail end and the crash could come literally any second now. I lived through dot.com and housing mania and I'm having serious deja moo right now. Deja moo is when you've seen this bull before. On a recent flight I saw a long format in-flight advertising video for DASH, an altcoin. I repeat: airline advertisements! If you still have doubts that we are in gibbering flapdoodle land, head over to YouTube: https://www.youtube.com/watch?v=hXRhIXp4idM https://www.youtube.com/watch?v=hXRhIXp4idM We have celebrity endorsements and music videos. Run away. I think the crash is going to look a lot like a bank run. There will be some piece of news that triggers it (exchange collapse, policy change, who knows) and then everyone will scramble to cash out. It will quickly become obvious that there is insufficient USD/EUR/etc. on hand to actually back the current market cap of the top ten coins. At that point exchanges will halt trading. Lawsuits will be filed. Exchanges will go into receivership. More lawsuits will be filed. Criminal charges may start getting filed. You get the picture. Most of the crime and financial fraud that will happen in this bubble is happening now or will happen during the crash itself. Most financial fraud is driven by frantic attempts to cover one's ass. My guess is that top people at all the exchanges know they are in serious trouble and there are many frantic meetings going on debating what can possibly be done. Since a bubble is basically a naturally occurring emergent Ponzi scheme, the only way "out" is to get more dumb money in so smart money can exit... hence the airline advertisements and Facebook ads to buy coins. I am currently seeing a lot of the latter. Sadly a lot of naive people will lose tons of money. People have been dumping their life savings and mortgaging their houses to get into this. It could have follow-on effects on the economy. Some of the big Bitcoin exchanges are privately insured, so I wonder if it could drag down a few insurance companies. The rest of the economy is fragile so it's not impossible that this could trigger a recession. Cryptocurrency will not go away post-crash any more than the Internet went away post dot.com crash. We're just approaching the irrational exuberance peak of the new technology adoption hype cycle. After the crash it will go back to being a semi-underground niche thing for a while. Valuations will return to sanity. Those exchanges and other businesses that do survive will gain a lot of experience and a reputation for stability. Ironically sometimes the best technical work gets done post-crash, so I wonder if after the crash we will finally see useful applications built on this tech beyond its core currency use case. If you really believe in the long term promise of this technology, after the crash would be the time to buy in. P.S. I really wish high schools would teach a class on finance, and if they did it should include a lesson on bubbles and a study of a few recent ones like dot.com and housing. People should be educated about what a bubble looks like and how to avoid getting ruined by one. It wouldn't stop everyone. The allure of herd behavior and gambling is strong. But it would save a few folks from losing their life's savings.
tboyd47 9y ago
Paradoxically, reading Buffett's essays on investing was one of the major inspirations for me to invest in crypto in the first place. Buffett typically only invests in things he understands well, that produce a solid return, and that are undervalued. These are good principles for anyone to follow. But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. The rest of us are pretty much just betting on horses. I think I would agree with him about crypto if I was an older person who already had enough wealth to purchase a significant stake in a real business. For investors like that, the world is their oyster. For people who are young, familiar with technology and largely without any wealth, Bitcoin is much more attractive. It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential. This statement would sound insane to someone like Buffett, but it's the reason why Bitcoin exists in the first place. Edit: I'm not advising people make any investments in Bitcoin. Just providing a counterpoint. Invest in what you know.
- pmyteh 9y ago
  > But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. A lot of that is simply that he now has too much money to be able to efficiently buy bits of companies. His early career was still based on value investing, but mainly consisted of regular stock purchases. Berkshire Hathaway still has decent-sized chunks of Coca Cola and various other companies on its books.
  - rmrm 9y ago
    Correct. His mindset or sugguestion is to only buy shares in a company you would wish to own entirely, and forever. Buffett stresses the ownership of the underlying business, rather than securities speculation.
    - deleted 9y ago
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  - 9y ago
legulere 9y ago
The way this looks this bubble just started to gain access to way more people: There's kodakcoin and the long blockchain company (formerly long island icetea): http://www.wired.co.uk/article/kodak-coin-ico-cryptocurrency-crypto http://www.wired.co.uk/article/kodak-coin-ico-cryptocurrency... Poor souls that invested/going to invest and don't manage to jump of the ship before the bubble bursts.
brndnmtthws 9y ago
Something to consider is that people like Buffett stand to lose the most from a completely egalitarian financial system, as is professed by Bitcoin idealists (such as myself). Another perspective here is that Buffett does understand Bitcoin, and wants to protect his own interests by maintaining the status quo.
KasianFranks 9y ago
Buffet, someone that says they don't invest in technology because they lazily "don't understand it" then advises clients not to invest in it. Also misses big run ups. Techs are on the top billionaires list for a reason.
pmarreck 9y ago
Fuck Buffett. Allow me to rephrase: No one is an oracle. Take everyone's perspective with a grain of salt. Warren Buffett is completely clueless when it comes to computers, much less cryptocurrencies.
- lolsal 9y ago
  To say he's 'completely clueless' seems like unnecessary hyperbole.
- PeterisP 9y ago
  When discussing the benefits and drawbacks of e.g. technical implementation of buying/selling with a cryptocurrency, "understanding cryptocurrencies" requires understanding cryptography, and currency markets are not particularly relevant. When discussing the benefits and drawbacks of decision to buy or sell a cryptocurrency, "understanding cryptocurrencies" requires understanding currency markets, and the cryptography is not particularly relevant. If anything, people with no practical experience in forex or stock trading (especially for less regulated or so-called penny stock markets) should be considered clueless in this regard.
- dang 9y ago
  Please don't post unsubstantive comments here.
polskibus 9y ago
I wonder if he shorted it if he meant it.
workthrowaway27 9y ago
The best part of the article was where Buffett said he'd buy put options on cryptocurrencies if he could, but wouldn't short them. I bet most investors in cryptocurrencies don't understand his reasoning there, and that's frightening. Note: I'm not saying they have to agree with it, but if you don't understand his point and are invested in cryptocurrencies you should really be asking yourself how much you really know.
- jm_l 9y ago
  I hate asking for spoilers but could you explain what the reasoning is?
  - meirelles 9y ago
    Short = Is "naked" operation, the maximum loss is unlimited. If the bitcoin goes to U$ 1 million then $0 next week you probably will be eaten alive by margin calls in the process. This is a very dangerous way to bet by nature. Put option = The maximum loss is the paid premium. [*] https://en.wikipedia.org/wiki/Put_option https://en.wikipedia.org/wiki/Put_option
  - hodder 9y ago
    His reasoning is that by definition speculative excess is irrational, therefore who is to say irrational markets can't get more irrational, particularly in the short term. In the short term markets are voting machines, in the long term they are weighing machines. Therefore shorting bitcoin is fairly stupid, as you can easily get run over and margin called or financially ruined if speculative excess continues and increases even if irrational. By going long, long term put options, unlike shorting a stock, on 5 year puts you a) cant get margin called and lose your shirt and b) They are long term enough that the whole speculative mania is likely to die down over time. And if it doesn't he would only lose the option premium, not an undefined amount of money. Finally, he considers assets that produce cash flows to be investments, while assets that don't (like gold, fine art, or bitcoin) to be speculation. And while there is nothing inherently wrong with speculation, he doesn't believe it is particularly enrichening either, and that purchasing productive assets is a far better use of his money. As a student of history, he has read about and witnessed many speculative manias that have ramped speculative assets (as well as investment assets far beyong anby rational value of their cash flows), and presumably think this one is likely to go the same way.
oliwarner 9y ago
I've seen plenty of people calling this a FOMO craze and that may well be the case, and demand may eventually fizzle out. But I think it's far more likely investors get spooked. Compared to market investors, relatively few of the people investing in cryptocurrencies understand the technical underpinnings. All it's going to take is a spate of high value hacks, another central service provider going down (MtGox v2) and thefts, or even an act of terrorism funded by Dogecoin... and you'll see a run. It may not be sustained, but I think this is an important difference from standard investment theory.

176 points by rayuela 9y ago

adamnemecek 9y ago

“Now when it happens, or how or anything else, I don’t know”. Oh, ok then.

deleted 9y ago
[deleted]
cjensen 9y ago
Determining that something is overvalued is vastly easier than determining when the overvaluation ends. I was one of those who saw the housing bubble for what it was in 2003. Among people who saw it, the causes of the bubble and the bubble psychology among buyers was well-understood. I had zero clue as to when or how the housing bubble would end. It lasted far longer than I anticipated. In other words, a smart investor can see when something is priced wrong. But only a foolish investor will tell you when or how the price will correct.

frgtpsswrdlame 9y ago

>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Hmm, in that way you could see it as the market around cryptocurrencies lacking the financial complexity that could bring their volatility back down to more normal levels.

cma 9y ago
The difference between a put and a short is a short has unlimited downside (the price you are shorting can go up far more than it can go down). This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s
elhudy 9y ago
I thought there are exchanges which allow crypto options trading?
- pzs 9y ago
  Futures are certainly available. I haven't heard of options yet, but that may just be my ignorance.
  - jabujabu 9y ago
    Bitfinex, Bitmex
    - frgtpsswrdlame 9y ago
      I think the counterparty risk involved in buying a long-dated (and expensive) put from one of those exchanges overwhelms any possible profitability. If Bitcoin really did crash, who's going to pay up for it? Right now there's not a very good answer.
  - vasilipupkin 9y ago
    ledgerx
- cdjk 9y ago
  Not in the volumes Buffett is interested in. And they are quite sketchy compare to regulated US financial markets.
- JumpCrisscross 9y ago
  Why would you trust, in the event of a Bitcoin meltdown, which is the case where your put pays off, that those exchanges would be in a position to honor their contracts?
  - elhudy 9y ago
    I'm not sure what you mean. Unless I am completely ignorant of the way financial markets work, the exchange is exchanging between two parties, and skimming off the top. They do not care what the price of Bitcoin is, as long as there is trading volume. They do not lose money in the event of a meltdown. The people selling the put options do.
panarky 9y ago
During the 2008 crisis Buffett bought a $5 billion stake in Goldman Sachs. He didn't buy shares on any exchange, he dealt directly with Goldman. Buffett doesn't need complex financial markets because he does custom transactions directly with companies. A Winklevoss could easily sell him a billion-dollar five-year put, but he wouldn't like the price.
- isolli 9y ago
  I think he would worry more about counterparty risk.
- JumpCrisscross 9y ago
  > he wouldn't like the price For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model [1]. This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway. I'll use the $14,400 Coinbase price [2] for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site [3] says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% [4]. The real shit show in this example is the rates component. If we use this 57% number [5], the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% [6]. BSM says...$1,037.01. (Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.) Raising our rate to the call money rate [7] we get $792.84 with rates continuing to dominate volatility. [1] https://en.wikipedia.org/wiki/Black–Scholes_model https://en.wikipedia.org/wiki/Black–Scholes_model [2] https://www.coinbase.com/charts https://www.coinbase.com/charts [3] https://bitvol.info https://bitvol.info [4] sqrt([5 x 365] / 252) x 5.21 [5] https://www.bloomberg.com/news/articles/2017-11-09/keynes-worked-out-the-bitcoin-interest-rate-it-s-57 https://www.bloomberg.com/news/articles/2017-11-09/keynes-wo... [6] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [7] https://www.bankrate.com/rates/interest-rates/call-money.aspx https://www.bankrate.com/rates/interest-rates/call-money.asp...
csomar 9y ago
I'm pretty sure you can construct that instrument for the right amount. I'm afraid will be exorbitantly high that he'll have to "re-consider" it.

rjromero 9y ago

Buffet and 99% of other traditional investors probably don’t understand p2p decentralization.

baus 9y ago
Personally I don't think Buffet is the type to be "blind-sided from rage-jealously," which is part of his success. Given how Berkshire stock is performing as of late, I don't think he has much to be jealous of.
- deleted 9y ago
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untog 9y ago
Tech exceptionalism strikes again! Buffet is a smart man, and I would bet that he could understand P2P decentralisation just fine. It's possible to be smart without being a programmer. But he knows investments a lot better than he knows Bitcoin tech. Why would an in depth knowledge of bitcoin override existing knowledge about investments? The tech of bitcoin certainly does nothing to prevent a bubble, and he's probably seen more bubbles come and go than the rest of us have had hot dinners.
- avip 9y ago
  Yet easier to be a programmer without being smart.
bradleyjg 9y ago
probably blind-sided from the rage/jealousy of missing the crypto boom An 87 year old man that's the third richest person in the US and whose tens of billions of dollars will be given away to charity (not even a charity named after himself) in a few short years when the inevitable happens, is blind-sided from rage/jealousy at having missed out on the crypto boom? Come on, you need a better model of other people.
- 9y ago

unknown_apostle 9y ago

He's right about the shorting: to short it using futures is, in a way, to side yourself with potential ruin. Only through put options can you safely do this.

comboy 9y ago
Can you elaborate? Why shorting wouldn't work?
- dmm 9y ago
  A short has an unlimited downside. A put contract has a fixed downside, the price of the contract, which is paid regardless of whether you exercise the option or not.
  - imranq 9y ago
    However a put must have an underwriter who must take the risk that it goes to zero
    - pzs 9y ago
      True, yet the downside is still limited. The worst case for the option seller (or writer) is that she has to buy an asset valued at zero for the pre-agreed strike price. That puts a cap on her loss.
  - perseusprime11 9y ago
    Can you explain this further? Is a put contract essentially saying that this stock is not worth it and will lose its value in the next few months?
    - workthrowaway27 9y ago
      A put allows you to sell an asset at a certain price in the future. So, say I bought a put option with a strike price of 10k USD for bitcoin 5 years from now. If in 5 years the price of BTC is less than (10k - the price I paid for the put option) I can buy a BTC for whatever it currently costs, sell it at 10k to whoever took the other side of the option and make a profit. The risk is that if the price of BTC is above 10k, then I'm out the money the put option cost me.

austenallred 9y ago

>If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.” Interesting to think what five year puts on a cryptocurrency would cost. Probably more than Buffett or anyone would want to pay.

MollyR 9y ago

That will only happen if fiat doesn't fail first, and its not looking good for fiat due to inflation and negative interest rates right now.

meri_dian 9y ago
What makes you think that?
nxsynonym 9y ago
I've seen literally zero evidence that fiat is failing. If you have any, please provide it.
- koonsolo 9y ago
  This article puts a big question mark of the quantitative easing done in 2008 on the dollar: http://www.heritage.org/monetary-policy/report/quantitative-easing-the-feds-balance-sheet-and-central-bank-insolvency http://www.heritage.org/monetary-policy/report/quantitative-...

deleted 9y ago

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brndnmtthws 9y ago

It's always good to see the same hot takes rehashed over and over on HN. I'm sure Bloomberg appreciates the ad revenue. Buffett (with all due respect, and I have a lot of respect for him) doesn't understand Bitcoin, and doesn't add anything of value to the discussion. He's never been much of a technology investor, so this should surprise no one.

samfisher83 9y ago
Crypto currency is an asset. He has bought and sold a lot of assets over time and has done pretty well. Google Tulip mania. The whole point of bitcoin was a form a digital currency. However due to the high transaction fees and volatility you can't really use it for that. I have no idea where it is going, but to dismiss a guy who has experience buying and selling things for a long time seems foolish.
- vasilipupkin 9y ago
  Buffet has a lot of expertise investing in businesses where cashflows can be analyzed. Not every investment is like that. Where it's not like that, his expertise is less valuable
  - TheAdamAndChe 9y ago
    Yet at the end of the day, Bitcoin is simply a store of value, just like any currency. And Buffet has plenty of experience with handling stores of value. Bitcoin's recent exponential growth screams "bubble" for anyone who knows what to watch for.
    - vasilipupkin 9y ago
      I don't get this whole store of value concept. Nothing is a store of value, all there is is investments with varying levels of risk.
      - TheAdamAndChe 9y ago

emag3m 9y ago

I wish he'd be alive long enough to see how wrong he is

deleted 9y ago

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dmichulke 9y ago

There are two types of investors. Those that don't understand cryptocurrencies and just ride the hype train; and those that do. To those that do, some rich guy's opinion doesn't mean a lot. It's just another opinion floating in the infinite opinion space. Authority means nothing to them. To all others: Sell!

ramblerman 9y ago
I was an early adopter and proponent of BTC, and have made a nice sum of it. But today I have some serious doubts: 1) What I initially found the best feature of BTC (the finite pool) has turned it into a digital gold, and unusable for real day to day transactions imo. 2) The blockchain is too slow, and too expensive. Now maybe BTC does have a future as digital gold, but not as a medium for transactions in the legal space (imo)
deadmetheny 9y ago
I would consider one of the most successful investors of all time to be a bit more than "some rich guy" hawking an opinion. He got rich by making smart long-term investments and watching market trends. Crypto is a foolish long-term investment. Even in the short-term it's akin to gambling.
- acdha 9y ago
  I don't think that was intended as a description of Buffet but rather describing how people will dismiss his experience. It's almost exactly how people trying to say that insolvient.com was a good buy because The World Has Changed™️ and only old people cared about profitability or, a decade later, that there was no way the real estate market could go down.
amsilprotag 9y ago
I'd love to see the results of the following survey given to a representative sample of cryptocurrency investors. 1) If you want to invest in cryptocurrencies, you should understand them. (true/false) 2) Most cryptocurrency investors don't understand cryptocurrencies. (true/false) 3) I understand cryptocurrencies. (true/false) I would guess each question would have 80%+ true responses.

viach 9y ago

Like everything is, including life?

at-fates-hands 9y ago

Wasn't this part of the lure with BTC to begin with? To be decentralized so it would be outside the bounds of manipulation by guys like Buffet?

slivym 9y ago
No. Not at all. The theory was to avoid government manipulation. It's actually much more susceptible to market manipulation due to the lack of regulation.

ghostbrainalpha 9y ago

Everything that ends, basically comes to a bad ending. Otherwise it wouldn't have ended.

scottmsul 9y ago

I've heard smart people say bitcoin will plummet because it has no intrinsic value. Well of course it doesn't! It's a currency. Currencies are an abstraction for value. Sure, right now bitcoin is not a good day-to-day currency because of high transaction fees and slow verification speeds. But there are new altcoins that have solved both of these, that exist right now! The real win for cryptocurrencies, in my opinion, is that it's public-key internet money, while debit cards are private-key internet money. With debit cards, you have to give someone your private key (16 digit combo+exp date+security code) in order to transact. Giving away your private key is prone to fraud, and the fraud-protection mechanism is to give a centralized authority access to everything you've ever purchased, and they look for anything "suspicious". On the other hand, with public-key money, when you give someone funds, there's no risk of them exposing you to fraud or unwanted transactions afterwards. Even though I understood the public-key mechanism for bitcoin early on, I didn't realize the full implications for the financial system until recently.

wildbunny 9y ago
The easy way to express this is: cryptocurrencies are true, digital cash
- JumpCrisscross 9y ago
  > cryptocurrencies are true, digital cash I just wired money from my brokerage account to my checking account at a different institution. It happened in thirty minutes and I was charged no fees. Digital cash has been the bulk of cash for many, many years.
  - taway1929293 9y ago
    That meets the /digital/ criteria but not the /cash/ criteria. consider that there are banks and accounts that you can't wire to, or that an account can be frozen. cash & bitcoin don't suffer this. there are a number of desirable properties that bitcoins have, and some downsides as well - digital is only half the equation.
  - 9y ago

nautilus12 9y ago

All i could focus on was the statement increase of 20% and how ambiguous that statement is whether you are referring to the original percentage or a percentage of that percentage (which is what he meant here).

littlestymaar 9y ago

I have a lot of friends investing in crypto-currencies recently, and here's the fun thing: most of them are well aware this is a speculative bubble, but it didn't stop them investing. Quite the opposite actually, they believe this is the beginning of the bubble, and they can make a several hundred percent investment in a short timespan. And they are quite right, in every speculative bubble, no value is ever destroyed, it's merely a transfered from some speculators to others, all they need to do is sell at the right time.

perseusprime11 9y ago
A lot of my friends lost money when Tron fell from 20+ cents to 10 cents. Beware of speculation. There will always be winners and losers and reading the bots on Reddit is not helping this bubble either.
JumpCrisscross 9y ago
> in every speculative bubble, no value is ever destroyed Public trust is destroyed by bubbles. That takes time to rebuild. In the meantime, it leaks into the political system. I was in an Uber the day Bitcoin hit $19,000. My driver was proud he'd just taken out a second line on his house to buy. There is a non-negligible chance he, and people like him, will end up on the public balance sheet as a result of these wealth transfers.
- littlestymaar 9y ago
  That's right, problems occur when people bet more that what they can lose. I'm convinced that's why the regulators don't like crypto-currencies. Not because they will lose their power, like some people seams to believe, but because they don't want a huge number of ruined people when the bubble collapses.
ataturk 9y ago
You just described how every intelligent person gets scammed everywhere--"I'm too smart to fall for their tricks, I'll know when to sell just at the right time!" No, you won't. Because you don't know the scam, you just think you know. It's not a coincidence that hundreds of Wall Street con men jumped into the crypto space in the past couple of years. You aren't going to outwit them. They know exactly how to operate their scams in a completely unregulated environment.

tromp 9y ago

I believe that 98% of the roughly 1400 coins listed on coinmarketcap will come to a bad ending, because the vast majority cannot has no good enough reason to exist. That includes all bitcoin clones with a few parameters tweaked and a different hash flavor of the hashcash PoW. Bitcoin continues to evolve, and will find more use cases with 2nd layer scaling solutions like Lightning. Ethereum continues to experiment with proof of stake and sharding solutions. Both will explore ways to increase privacy, hopefully in ways that do not impair scaleability. Those two are the only ones I am reasonably sure will still list near the top, 10 years from now.

sfifs 9y ago
You're betting around 30 will survive? What would be the reason for survival of so many?
- saosebastiao 9y ago
  If I'm an american and want to buy something in china, I need to pay renminbi. Typically this happens via some proxy financial institution, who will process the transaction through the various distributed global currency markets. The same could be true in the future of crypto, although national borders may not be the defining trait, but rather the relative properties of a currency and preferences of the sender or recipient. There are enough nuances between crytpocurrencies that there is room for more than a handful.
- tromp 9y ago
  Many coin founders profit handsomely from their creation, often holding an obscene fraction of coins, or in some cases, gaining ever more through certain gimmicks. They can afford to heavily market their coin and fund further development, even if of technically questionable nature.
- realusername 9y ago
  There's a lot of truly revolutionary ideas with some of them, the currency aspect is only the absolute top of the iceberg. I could clearly see 20 to 30 ones which are not just cheap copies of other ones.

perseusprime11 9y ago

I think except for Bitcoin, most altcoins have no infrastructure or developers working on it and hence doomed to fail. There is definitely a bubble and individual investors not knowing how to time the market will fail and lose lots of their hard earned money.

api 9y ago

Cryptocurrency is currently in the silly phase of bubble. It looks exactly like the peak of dot.com mania. A crash is coming fairly soon. My top end estimate for time remaining would be a year, but I'd warn anyone contemplating a shorting strategy that bubbles have a way of going far higher than anyone can predict. Many people lost serious money trying to short dot.com and housing. Still we are definitely in the fragile tail end and the crash could come literally any second now. I lived through dot.com and housing mania and I'm having serious deja moo right now. Deja moo is when you've seen this bull before. On a recent flight I saw a long format in-flight advertising video for DASH, an altcoin. I repeat: airline advertisements! If you still have doubts that we are in gibbering flapdoodle land, head over to YouTube: https://www.youtube.com/watch?v=hXRhIXp4idM https://www.youtube.com/watch?v=hXRhIXp4idM We have celebrity endorsements and music videos. Run away. I think the crash is going to look a lot like a bank run. There will be some piece of news that triggers it (exchange collapse, policy change, who knows) and then everyone will scramble to cash out. It will quickly become obvious that there is insufficient USD/EUR/etc. on hand to actually back the current market cap of the top ten coins. At that point exchanges will halt trading. Lawsuits will be filed. Exchanges will go into receivership. More lawsuits will be filed. Criminal charges may start getting filed. You get the picture. Most of the crime and financial fraud that will happen in this bubble is happening now or will happen during the crash itself. Most financial fraud is driven by frantic attempts to cover one's ass. My guess is that top people at all the exchanges know they are in serious trouble and there are many frantic meetings going on debating what can possibly be done. Since a bubble is basically a naturally occurring emergent Ponzi scheme, the only way "out" is to get more dumb money in so smart money can exit... hence the airline advertisements and Facebook ads to buy coins. I am currently seeing a lot of the latter. Sadly a lot of naive people will lose tons of money. People have been dumping their life savings and mortgaging their houses to get into this. It could have follow-on effects on the economy. Some of the big Bitcoin exchanges are privately insured, so I wonder if it could drag down a few insurance companies. The rest of the economy is fragile so it's not impossible that this could trigger a recession. Cryptocurrency will not go away post-crash any more than the Internet went away post dot.com crash. We're just approaching the irrational exuberance peak of the new technology adoption hype cycle. After the crash it will go back to being a semi-underground niche thing for a while. Valuations will return to sanity. Those exchanges and other businesses that do survive will gain a lot of experience and a reputation for stability. Ironically sometimes the best technical work gets done post-crash, so I wonder if after the crash we will finally see useful applications built on this tech beyond its core currency use case. If you really believe in the long term promise of this technology, after the crash would be the time to buy in. P.S. I really wish high schools would teach a class on finance, and if they did it should include a lesson on bubbles and a study of a few recent ones like dot.com and housing. People should be educated about what a bubble looks like and how to avoid getting ruined by one. It wouldn't stop everyone. The allure of herd behavior and gambling is strong. But it would save a few folks from losing their life's savings.

tboyd47 9y ago

Paradoxically, reading Buffett's essays on investing was one of the major inspirations for me to invest in crypto in the first place. Buffett typically only invests in things he understands well, that produce a solid return, and that are undervalued. These are good principles for anyone to follow. But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. The rest of us are pretty much just betting on horses. I think I would agree with him about crypto if I was an older person who already had enough wealth to purchase a significant stake in a real business. For investors like that, the world is their oyster. For people who are young, familiar with technology and largely without any wealth, Bitcoin is much more attractive. It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential. This statement would sound insane to someone like Buffett, but it's the reason why Bitcoin exists in the first place. Edit: I'm not advising people make any investments in Bitcoin. Just providing a counterpoint. Invest in what you know.

pmyteh 9y ago
> But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. A lot of that is simply that he now has too much money to be able to efficiently buy bits of companies. His early career was still based on value investing, but mainly consisted of regular stock purchases. Berkshire Hathaway still has decent-sized chunks of Coca Cola and various other companies on its books.
- rmrm 9y ago
  Correct. His mindset or sugguestion is to only buy shares in a company you would wish to own entirely, and forever. Buffett stresses the ownership of the underlying business, rather than securities speculation.
  - deleted 9y ago
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- 9y ago

legulere 9y ago

The way this looks this bubble just started to gain access to way more people: There's kodakcoin and the long blockchain company (formerly long island icetea): http://www.wired.co.uk/article/kodak-coin-ico-cryptocurrency-crypto http://www.wired.co.uk/article/kodak-coin-ico-cryptocurrency... Poor souls that invested/going to invest and don't manage to jump of the ship before the bubble bursts.

brndnmtthws 9y ago

Something to consider is that people like Buffett stand to lose the most from a completely egalitarian financial system, as is professed by Bitcoin idealists (such as myself). Another perspective here is that Buffett does understand Bitcoin, and wants to protect his own interests by maintaining the status quo.

KasianFranks 9y ago

Buffet, someone that says they don't invest in technology because they lazily "don't understand it" then advises clients not to invest in it. Also misses big run ups. Techs are on the top billionaires list for a reason.

pmarreck 9y ago

Fuck Buffett. Allow me to rephrase: No one is an oracle. Take everyone's perspective with a grain of salt. Warren Buffett is completely clueless when it comes to computers, much less cryptocurrencies.

lolsal 9y ago
To say he's 'completely clueless' seems like unnecessary hyperbole.
PeterisP 9y ago
When discussing the benefits and drawbacks of e.g. technical implementation of buying/selling with a cryptocurrency, "understanding cryptocurrencies" requires understanding cryptography, and currency markets are not particularly relevant. When discussing the benefits and drawbacks of decision to buy or sell a cryptocurrency, "understanding cryptocurrencies" requires understanding currency markets, and the cryptography is not particularly relevant. If anything, people with no practical experience in forex or stock trading (especially for less regulated or so-called penny stock markets) should be considered clueless in this regard.
dang 9y ago
Please don't post unsubstantive comments here.

polskibus 9y ago

I wonder if he shorted it if he meant it.

workthrowaway27 9y ago

The best part of the article was where Buffett said he'd buy put options on cryptocurrencies if he could, but wouldn't short them. I bet most investors in cryptocurrencies don't understand his reasoning there, and that's frightening. Note: I'm not saying they have to agree with it, but if you don't understand his point and are invested in cryptocurrencies you should really be asking yourself how much you really know.

jm_l 9y ago
I hate asking for spoilers but could you explain what the reasoning is?
- meirelles 9y ago
  Short = Is "naked" operation, the maximum loss is unlimited. If the bitcoin goes to U$ 1 million then $0 next week you probably will be eaten alive by margin calls in the process. This is a very dangerous way to bet by nature. Put option = The maximum loss is the paid premium. [*] https://en.wikipedia.org/wiki/Put_option https://en.wikipedia.org/wiki/Put_option
- hodder 9y ago
  His reasoning is that by definition speculative excess is irrational, therefore who is to say irrational markets can't get more irrational, particularly in the short term. In the short term markets are voting machines, in the long term they are weighing machines. Therefore shorting bitcoin is fairly stupid, as you can easily get run over and margin called or financially ruined if speculative excess continues and increases even if irrational. By going long, long term put options, unlike shorting a stock, on 5 year puts you a) cant get margin called and lose your shirt and b) They are long term enough that the whole speculative mania is likely to die down over time. And if it doesn't he would only lose the option premium, not an undefined amount of money. Finally, he considers assets that produce cash flows to be investments, while assets that don't (like gold, fine art, or bitcoin) to be speculation. And while there is nothing inherently wrong with speculation, he doesn't believe it is particularly enrichening either, and that purchasing productive assets is a far better use of his money. As a student of history, he has read about and witnessed many speculative manias that have ramped speculative assets (as well as investment assets far beyong anby rational value of their cash flows), and presumably think this one is likely to go the same way.

oliwarner 9y ago

I've seen plenty of people calling this a FOMO craze and that may well be the case, and demand may eventually fizzle out. But I think it's far more likely investors get spooked. Compared to market investors, relatively few of the people investing in cryptocurrencies understand the technical underpinnings. All it's going to take is a spate of high value hacks, another central service provider going down (MtGox v2) and thefts, or even an act of terrorism funded by Dogecoin... and you'll see a run. It may not be sustained, but I think this is an important difference from standard investment theory.