VC Investor schools Warren Buffet on the value of Bitcoin, after the "Oracle of Omaha" called Bitcoin "rat poison". Fred Wilson explains the “production” value of crypto assets.
In the world of bitcoin, there are a lot of conflicting opinions. This is especially true when it comes to the bitcoin price, which is always a subject of heavy debate. Fred Wilson, venture capitalist and co-founder of Union Square Capital which has investments in Tumblr, Twitter, Kickstarter, Foursquare and other web 2.0 companies, wrote a sort of open letter response to the latest comments made by Warren Buffet and Charlie Munger.
Wilson writes that he would agree if Buffet was talking about a collectible like baseball cards but what he argues that Buffet doesn’t understand is that Bitcoin – cryptocurrency and the technology that make them work are producing something very important and valuable:
"They are the fuel that powers a new form of technology infrastructure that is being built on top of the foundational internet protocols. Ethereum and EOS are smart contract platforms that allow developers to create decentralized applications (Dapps in the vernacular of crypto). Bitcoin and Zcash are stores of value that allow users to participate in this decentralized application space without the need for fiat currencies.
This is the key phrase of Buffet’s that I feel is incorrect “if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything.”
Crypto-assets produce decentralized infrastructure. Bitcoin has produced a transaction processing infrastructure that looks a lot like Amazon Web Services (something I am sure Buffett would agree is extremely valuable). Ethereum has produced a similar transaction processing infrastructure which is also able to run smart contracts. I believe smart contracts are the most important innovation we have yet seen in crypto.
What Buffett and Munger may also be saying is that they don’t know how to value this “fuel” that powers the creation of this decentralized infrastructure. If they are saying that, then I agree with them. I don’t know how to value this fuel either. We cannot use discounted cash flow because this decentralized infrastructure may not produce a lot of cash flow. It is designed to create hypercompetitive networks that are self-commoditizing.
It is much more likely that these crypto assets will trade and be valued like currencies that underpin economies. There has been a lot of research and writing on that. I have recommended Chris Burniske’s Cryptoassets book here before and I will do so again. Chris outlines much of this thinking in that book."