Renowned investor Charlie Munger, Warren Buffett’s esteemed associate, has once again joined cryptocurrency skeptics and voiced his dissenting views on cryptocurrency.
Speaking at the Sohn Hearts and Minds Investment Conference, Munger made his stance unequivocally clear: he is no fan of cryptocurrencies. In fact, he commended China’s efforts to prohibit cryptocurrencies entirely. He went a step further, articulating his desire to generate wealth by offering products and services that benefit people. “Trust me, those behind cryptocurrencies are not concerned about the well-being of consumers, but rather their own interests,” Munger asserted.
Cryptocurrency skeptics believe bitcoin is in a bubble
Munger’s assessment extends to his belief that the current cryptocurrency surge surpasses even the fervor of the late 1990s internet bubble. “Everyone’s eager to dive in, but I’m staying on the sidelines,” he maintained. In Munger’s eyes, cryptocurrency serves as a haven for criminals and extortionists, painting the entire cryptocurrency landscape as both abhorrent and detrimental to society.
The Ignored Potential
While Charlie Munger boasts an impressive investment track record, his perspective on cryptocurrencies appears to miss the mark. This oversight may echo his skepticism regarding dotcom startups and the vast possibilities of the internet in 1999, a time when Warren Buffett and Munger doubted the potential of the digital landscape. Back then, a bubble indeed existed, but subsequent years witnessed the ascension of tech giants such as Google and Facebook. It wasn’t until 2011 that Buffett and Munger made their initial foray into the tech industry with IBM, followed by investments in Apple in 2016 and Amazon in 2019.
Munger’s current stance seems reminiscent of his late-90s skepticism. For instance, Amazon held its initial public offering in 1997, yet received little attention from Buffett and Munger due to prolonged financial losses. While numerous internet startups faltered, a select few emerged as industry behemoths. In 2021, Amazon reported a net profit exceeding $21 billion. Munger and Buffett’s penchant for value stocks doesn’t seem to align with an innate understanding of emerging technologies.
Naturally, the cryptocurrency market exhibits its own share of excesses, including the proliferation of ‘dog coins’ like Shiba Inu and fraudulent initial coin offerings (ICOs). It is essential to differentiate these irregularities from the global monetary network represented by Bitcoin.
Bitcoin’s Global Monetary Network
Bitcoin is a distinctive hybrid, serving as both a currency and a global monetary network. Unveiling this concept can be challenging for many. The underlying blockchain technology is decentralized and resistant to manipulation thanks to the proof-of-work protocol. Moreover, Bitcoin’s capped supply, restricted to 21 million coins, positions it as an enticing hedge against the unbridled money printing pursued by central banks. It shares common attributes with gold, representing scarcity and durability, and offers the added advantage of divisibility into tiny units known as Satoshis. Furthermore, Bitcoin facilitates cost-effective global transfers, seamlessly sending assets worldwide between, for example, a wallet in Japan and one in Europe.
The beauty of Bitcoin is its accessibility, open to anyone with an internet connection. Transactions occur without reliance on central authorities, such as banks, a stark departure from the fiat money system. The decentralized nature of Bitcoin implies that governments and central banks lack control over it, unable to influence its behavior.
Demystifying Cryptocurrency’s Criminal Connection
Charlie Munger’s assertion that cryptocurrency primarily serves criminals is a distorted view. In reality, criminal activity accounts for a minuscule fraction of cryptocurrency transactions. According to CipherTrace, a mere 0.5% of cryptocurrency transactions are linked to illicit activities, whereas in fiat currencies like euros or dollars, this figure rises to 2% or even 4%. The transparent nature of blockchain technology allows efficient monitoring of financial flows, a feat that is impossible to replicate with cash. Criminals contemplating extortion and payment demands in Bitcoin must think twice, as advanced software applications can unmask even those attempting to obscure their digital tracks using mixers.
Bitcoin’s Societal Benefits
While Munger highlights cryptocurrency’s pitfalls, he seemingly overlooks its tangible benefits for ordinary individuals. Consider the case of El Salvador, where the Bitcoin Lightning Network has transformed remittances, saving millions of dollars. Countless Salvadorans without access to traditional banking services can now create a smartphone wallet and receive low-cost remittances from family members abroad via Lightning.
Critics often cite Bitcoin’s considerable energy consumption, an essential component of blockchain security. Storing gold, for example, involves substantial expenses, including secure vaults and security measures. In contrast, Bitcoin achieves this with energy consumption, allowing for an apt comparison. It’s also noteworthy that an increasing proportion of green energy is applied to Bitcoin mining.
China’s Ban: A Dubious Model
Munger’s commendation of China’s strict approach to cryptocurrency disregards the inherent nature of a decentralized network. While a government can restrict access to and from cryptocurrency exchanges, individuals can always create new wallets and conduct transactions through hardware wallets or smartphones.
China’s motivations lie in its ambition to introduce a central bank digital currency (CBDC), which the government can fully control. Such a currency is programmable, enabling the government to impose restrictions on specific products or services. An expiry date may be imposed, rendering the currency valueless if not spent within a stipulated timeframe. The government gains precise insights into individual spending, enabling them to impose penalties for undesirable purchases. A CBDC may even facilitate personalized carbon emissions tracking to combat climate change. This trajectory may lead to extensive surveillance and intrusion, a prospect met with caution.
In summary, while cryptocurrency skeptics voice concerns, the allure and potential of cryptocurrencies, particularly Bitcoin, continue to reshape financial paradigms and offer alternative, globally accessible monetary systems.
