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Warren Buffett Says Bitcoin Is 'A Mirage;' Why Marc Andreessen Thinks He's Wrong

Mar 26 2014, 7:26pm CDT | by , in News | Technology News

Warren Buffett Says Bitcoin Is 'A Mirage;' Why Marc Andreessen Thinks He's Wrong
 
 

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Warren Buffett Says Bitcoin Is 'A Mirage;' Why Marc Andreessen Thinks He's Wrong

Earlier this month, famed dealmaker Warren Buffett warned investors to stay away from Bitcoin, calling it “a mirage,” saying that, while it may be a better way of transmitting money, the “idea that it has some huge intrinsic value is just a joke.” While interviewing Bitcoin investor Marc Andreessen at a CoinSummit “fireside chat” (minus the fire) Tuesday, I asked him to respond to Buffett. He supplied the missing flames.

“The historical track record of old white men who don’t understand technology crapping on new technology they don’t understand is at, I think, 100%,” said venture capitalist (and younger white man) Marc Andreessen. Fellow Andreessen Horowitz partner Balaji Srinivasan quipped that Bitcoin has outperformed Buffett’s “Berkshire Hathaway by a lot in the last year.” (42 minute mark)

Andreessen’s “skewering” of Buffett has gotten lots of news coverage, but the answers were actually rather glib. Lots of burn, but not much kindle. So I followed up with Andreessen for a more substantive response to Buffett’s Bitcoin criticism. Here’s Buffett’s full Bitcoin takedown:

“Stay away. Bitcoin is a mirage. It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? You can transmit money by money orders. People do it. I hope bitcoin becomes a better way of doing it, but you can replicate it a bunch of different ways and it will be. The idea that it has some huge intrinsic value is just a joke in my view.”

Buffett says Bitcoin is a very fast anonymous money order. Companies that send money orders make money off of them, so investing in the companies that control the money orders makes sense (the Coinbases and Bitpays of the world) but the money orders themselves (i.e. Bitcoins) aren’t worth buying as an investment. That’s a valid critique. During our chat, Andreessen and Srinivasan said Bitcoin is the “next Internet.” People often compare it to Internet protocols that enabled the development of email and the World Wide Web as we know it. But protocols and the “Internet” don’t make money; the valuable systems built on top of them do. Buffett is essentially saying Bitcoin is a protocol like TCP/IP that isn’t a money maker, and is encouraging investors not to drop $600 bucks/coin (even if unlike TCP/IP, the supply of Bitcoin is limited).

“This is a standard trope of technology criticism by people who don’t understand technology,” says Andreessen by email. “‘Yes, sure, it’s great technology, but it won’t be useful or valuable in the way that those crazy nerds think it will be useful or valuable.’ I’ve heard it my whole life applied to every new important technology. It’s fake sophistication — it sounds nuanced but it’s not.”

Andreesen says the argument “completely misses the logic flow of how Bitcoin works.” When I suggested that the actual value of “a bitcoin” is arbitrary, and that more important than the value is the fact that it’s fluid, and easily converted to “real money,” he objected.

“A value of a BTC is not arbitrary, in fact it’s the opposite of arbitrary,” he says. “It equals the value of a single slot in a finite sized public cryptographic ledger through which value can move. The total Bitcoin ledger has value corresponding to the volume and velocity of transactions that will run through it in the future; by extension, each slot in the ledger has fractional value determined by the total number of slots (which, in Bitcoin’s case, are limited to 11 million today and 21 million ever).”

“So saying what Warren is saying is like saying ‘a car is great technology but it’ll never actually get anyone from point A to point B,” he continued. “Bitcoin is great technology BECAUSE it lets people get value from point A to point B through the public ledger; that functional use creates the value of the ledger, and a single BTC has a corresponding fractional value of the ledger.”

To belabor the car analogy, isn’t Bitcoin more like a taxi than a car one owns? The value is in giving money a ride from one place to another. Those in the taxi don’t care what the taxi’s worth, just how much the ride will cost, i.e. what the Bitcoin transaction fees would be. So why does the value of the Bitcoin taxi matter, and why should people invest in it assuming it will go up? In fact, it seems problematic if you care about the value of the taxi (or the Bitcoin), because then you might not want to drive it/use it, assuming it’s going to get more valuable. That means fewer slots on the ledger that can be used for value transfer — the whole point of Bitcoin.

Andreessen then broke out economic theory, saying that the velocity of money will overcome the effect of Bitcoin hoarders, and that hoarders will essentially lead to more valuable Bitcoin.

“The market cap of the ledger needs to be high enough to accommodate all of the value that wants to PASS THROUGH it in any period of time (volume & velocity of value passing through),” Andreessen wrote. “So then, the intrinsic value of a BTC is emergent from the functional value of the ledger as a way to exchange value (or, more accurately, emergent from the collective forecast of the future volume & velocity of value that will pass through the ledger).”

This of course assumes that lots of people settle on using Bitcoin as their cryptocurrency of choice, rather than one of the alt-coins out there or a cryptocurrency without a limit on coins created. And it requires lots of systems dependent on Bitcoin, to up the amount of value that wants to pass through.

So Buffett and Andreessen’s disagreement will remain unresolved. Only a time traveler could declare the victor.

Source: Forbes

 

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<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
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