Why Warren Buffet’s “theory” behind his non-investment choice in Bitcoin is wrong, Part 3 (final)
According to Buffett, the price of Bitcoin is growing “just because people keep investing money in it” and that would be a “bubble”. Now, let us put aside for a moment the distortions in stock prices produced by artificially low interest rates. If the price of Buffett’s investment fund grows, it is thanks to the fact that people (and companies) invest money in it. And they do it because the profits of the companies on which the fund has invested (let’s say Starbucks) grow. But these profits grow “just because” some people decide to spend money in a cake instead of in a book. And if they make this choice, it means that for them, at that time and place, the benefit they get from eating a cake is greater than what they get from reading the book.
That is to say, in the long run the price of Bitcoin increases for the same reason the share prices of the investment fund BRK-A increase: the scientific law of the subjectivity of economic value. This law states that the value lies in people: in the importance they give (on the basis of their preferences, their individual priorities, their knowledge, their being in a certain place at a certain moment) to certain goods, and not in goods themselves.
The fact that money is a commodity “different from others” does not change the validity and universality of the subjective theory of value. One of the main differences between a cake and a quantity of money is that, if the price of the first was zero, people would elbow to grab it. On the other hand, if the price of money (that is, its purchasing power in terms of other goods) was zero, no one would be concerned with obtaining it because, since it could not act as a means of exchange, it would not be money. This difference between money and “normal” goods doesn’t change the subjective theory of value, which applies to a fraction of Bitcoin and a cake in exactly the same way.
In a free market, the subjectivity of value is the basis of every exchange and helps to define the trend of each price. Consequently, to say that the price of Bitcoin grows “just because” people continue to invest money in it is like saying that a particular stone falls to the ground “just because” it is subject, unlike other stones, to gravity force.
Is Bitcoin a bubble?
According to Buffett, Bitcoin is a “bubble” because it is a non-productive good on which people “continue to invest money”. As we have seen above, the fact that people “continue to invest money” in a non-productive asset, increasing its price, doesn’t constitute a “bubble”, but is a fact that underlies the subjective theory of value and therefore the price formation process.
Given this, the term “bubble” can be used to indicate different things.
On the one hand, it can be used to indicate an economically unsustainable increase in the price of an asset due to people’s choices. This is for example the case of the current “bubble” of many ICOs (Initial Coin Offerings) and probably of different Altcoins.
On the other hand, the same term “bubble” can be used to indicate an economically unsustainable increase in the price of an asset due to the coercive activity of governments. This is, for example, the case of the financial bubbles inflated by the artificial expansion of money and credit by central banks.
In both cases, the increase of the asset price sooner or later must necessarily face a correction.
A difference between the two cases, however, is that while in the first case the system tends to self-correct itself quickly enough, in the second the “bubbles” tend to occur systemically and don’t self-correct; and this leads them to last much longer (as in the case of the bubble of the purchasing power of fiat money).
To distinguish the two cases, we find it more appropriate to call the first “fad investments” and the second “bubbles”.
Bitcoin clearly cannot be a bubble (in fact, there is no government coercion and it is born in antithesis to the latter). Those who believe that Bitcoin is a “fad investment” don’t understand what is Bitcoin and above all don’t understand what are the problems that solve at the level of monetary and political structure.
The Buffett’s “theory” at the heart of his choice of non-investment in Bitcoin is a superstition, not a theory. In particular, it is a reasoning that is in contrast with economic and monetary theory. A theory, the economic one, is logically deduced from self-evident axioms and therefore scientific, objective, incontrovertible.
Buffet’s reasons would remain wrong even if in the future Bitcoin would fail and its price would definitely go to zero. In other words, if Bitcoin should continue to be successful, this would not be a proof that Buffett’s reasons are wrong. We already have this proof ex ante (and we can only have it ex ante) on the basis of economic theory, that is, the logic applied to human action.