The Cryptocurrency Bear Fallacy: 3 Reasons Why Warren and Fiat Currency Apologists Are Wrong

A list of global elites taking strong bear positions against cryptocurrency continues to grow by the day. The most recognizable in the news lately is Warren Buffet. Warren Buffet and his team at Berkshire Hathaway made sure to undress cryptocurrency at their recent shareholders meeting. What I find most interesting about Warren Buffet’s recent attack on cryptocurrency is his temperament. Buffet is normally mild mannered and logical when approaching markets but his recent comments are borderline juvenile with Ad Hom attack’s on cryptocurrency.

Buffet is not the only global elite to fall in this category. CEO of JP Morgan, Jamie Dimon, has also had many emotional outbursts about cryptocurrency.  And there is the famous Dr. Doom Keynesian economist, Nouriel Roubini, who has not been shy about his hatred of cryptocurrency and blockchain technology.  Whenever I see a new article come up about cryptocurrency bears I always try to understand and address the argument they are making.  Who knows, they might change my position but to-date I have yet to see a logical and well thought argument from the global elites.

For the sake of this blog I want to address two particular points that Warren Buffet made to his shareholders about cryptocurrency. The quote that will get the most attention from that meeting is Buffet calling Bitcoin “rat poison squared”, this is nothing more than Ad Hom antics to draw attention from a real debate about the efficacy of cryptocurrency.  The important statements made by Buffet at the shareholder meeting have to do with his philosophy on value.  Below are two important statements Buffet made that I will address.

“Unlike real estate or company stocks, virtual currencies have no real value and only attract charlatans.”

“If you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything,” “You’re just hoping the next guy pays more.”

Buffet is making an objective claim on value and market pricing in the above statements which gets at the heart of economic theory.  My position is that there are two reasons why players like Buffet and Dimon are cryptocurrency bears.  The first reason is a pure dichotomy in economic philosophy and the second is a general misunderstanding of the underlying technology.  Now whether this is purely a philosophical difference or protectionism of the current system is not something we will know but does not matter when a logical case is made against the cryptocurrency bear fallacy. Below are three reasons why the general bear position presented by the global elites is wrong.

Value is Subjective: In the 19th century three men independently and simultaneously came up with the concept of subjective theory of value.  The thinkers at this time were definitely working hard to find solutions to certain problems within value theory so it is no surprise that this occurred. According to the Mises institute, The subjective theory of value is a doctrine of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor required to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of their desired ends

Buffet is making the case that value is derived from the property and/or labor of the good or service.  There is a significant problem with this position, it does not hold up in the marketplace.  The famous diamond-water paradox could not be solved with labor theory of value and it took the three men mentioned above with subjective theory of value to solve this issue of value. Value and subsequently market pricing is based purely on individuals constantly changing subjective value sets.

In a world of fiat currency and fractional reserve banking the global elite want to dictate to the masses what is and is not valuable.  This is one of the main reasons Bitcoin was created and why there is a global populism movement.  Individuals want to take back how they value and price scarce resources and not be told what is and is not valuable. If an individual wants to value cryptocurrency then that creates value and if there are more than one individuals that want to trade that cryptocurrency then that is the start of a market to establish pricing.  By Buffet saying there is no value he is effectively making a value judgement for millions of people he does not know.  At its basis this is utter arrogance and at its core highly illogical.

Use Does Not Dictate Value:  Buffet doubles down on his position by stating that something has to be produced to have value.  This is making the mistake that use value drives market pricing and hits at the very heart of the diamond-water paradox and marginal utility.  Water clearly has more use value in life but its market value (price) is significantly lower than a diamond that has very little use value.  Any scarce resource we desire has value, this is not confined to tangible and material items with use value.  Time and love are scarce resources that we greatly value in our society, these are always part of our subjective value sets.  Love might not have specific use value but it has significant spiritual and psychological value, thus, it is valuable and priced in products and services all the time.

There is no better example of this than fine art as an asset class.  Even though art does not produce anything with use value it has been one of the best performing asset classes in the last century.  The fine art asset class has outperformed the S&P 500 by 2 percent in the last 15 years.  Art unlike real estate or a utility company are not essential assets, we do not need it for survival yet we value and price fine art like any other asset class. Why? Because it is scarce and gives owners their specific desired ends.  I own art and I value it because it meets a desired ends of something that has meaning and beauty and for me and many others that is enough. This is the fundamental point of value that Buffet is missing in his statements above.

Technology Drives Human Behavior:  When you read the original Bitcoin white paper it is very obvious that this was more about an experiment in a payment processing system than it was about currency.  Satoshi  laid out a beautiful and simple case of how to deal with double pay in a decentralized system.  Specifically how two trust-less entities pay one another without an intermediary.  Thanks to Bitcoins foundation we now know that “x” can pay “y” without a mutually trusted “z” in the middle of the transaction to verify.  It just so happened that a currency was attached to this payment system that allowed for sound money but the real power in Bitcoin is the payment system.

Anyone who has had to transfer money for business or personal reasons knows how inefficient and expensive this process is.  There is a reason companies like PayPal and Venmo have been so successful, the centralized banking system is an ineffective system for moving money.  Thanks to what Bitcoin started I can now move thousands of dollars or in this example, Stellar Lumen, in a matter of seconds for a fraction of a cent without a centralized intermediary. This is something that banks could never comprehend.

It is the first time in human history we have seen the combination of a currency and payment system which is also part of the value behind cryptocurrency, it makes the system as a whole highly effecient.  Curency and payment systems have always been separated.  We use technologies like Venmo, PayPal, and Visa to move our fiat currency but never were the two combined.  Putting the currency argument aside the payment system alone has significant value purely based on its predecessors like Visa, Paypal, and Venmo.  Dismissing the value of the underlying technology of cryptocurrency by Buffet is either lazy or intentional.

The devil is in the details when it comes to understanding cryptocurrency and the reaction of titans like Buffet and Dimon.  We can not take their words at face value (pun intended), we must dig into the meaning behind their words and philosophy.  On the other side of the spectrum you have young Billionaires like Peter Thiel and Tim Draper that are cryptocurrency bulls and much more intellectually honest.  They have made their fortunes not off loose money and fractional reserve banking but on making smart investments in emerging technologies that will change the shape of society.  Notice that their comments are never juvenile nor rooted in Ad Hom, they have nothing to lose from a change in technology because they live their lives knowing that this will always change and they embrace this reality.  Unlike the old guard that has everything to lose from a change, aside from a logical argument on the merits of cryptocurrency a lot can be gleamed from behavior alone. Hold on, we are in for quite a ride when it comes to the evolution of cryptocurrency.

I outline a much more comprehensive case for cryptocurrency in my white paper “A Case for Cryptocurrency: The Currency for the Fourth Industrial Revolution.”  and below are links to a few other blogs I have written on this subject.

“Congress and Cryptocurrency: The Illusion of Knowledge”

“Is Bitcoin a Fraud”