Why Charlie Munger was wrong about Bitcoin

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for UnHerd. Opinions are his own.

“A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house.” — Charlie Munger, former vice chair of Berkshire Hathaway

The late Charlie Munger hated crypto with a passion. It led him to a whole series of diatribes. Here is another one:

“I think the people that oppose my position are idiots. And so I don’t think there is a rational argument against my position.”

So that was that.

I would not for a minute suggest that investors should take his comments seriously. And yet, Munger was one of the greatest investors of his generation.

Suffice it to say, he did not spend much quality time considering the merits and demerits of Bitcoin and other crypto assets, which he treated as a pile of fungible fakes.

What we should take seriously, however, is Munger’s approach to investment in general.

During my career as a financial journalist, I met some of the world’s most successful investors — though unfortunately not Munger. They differed widely in terms of their investment strategies, the willingness to take on risk, and the extent to which they were instinctive investors, or relied on technical analysis.

They certainly disagreed on politics. But when it comes to investment they have one thing in common. They are — without exception — intellectually promiscuous. As John Maynard Keynes said: “When the facts change, I change my mind. What do you do, Sir?”

They change their minds more often than the facts change. This is how I can tell that Munger’s disgust with crypto was not about investment. No investor of his calibre would ever be so categorical. This was about politics. He hated the idea of any payment systems that exist outside the control of governments. And he was acutely aware of the importance of the health and stability of fiat money to the entire investment universe.

While I don’t share Munger’s views on crypto, I am also not sold on the reasons for Bitcoin’s most recent rally. This was triggered by the introduction of ETFs and a shift in market sentiment on inflation.

Inflation and cryptocurrencies

The US had good inflation data in October that prompted a wider market reassessment on interest rates. I don’t believe in the scenario of immaculate disinflation because many of the underlying inflationary pressures have not gone away: ageing populations, high budget deficits, expensive reshoring of production, and a rise in global trade tensions.

What we do know is that crypto assets have not turned out to be a great hedge against inflation. Bitcoin fell below $17,000 last November, when inflation was 7.1% in the US and 10.1% in the Eurozone. Since we denominate the price of Bitcoin in US dollars, its fortune is based to a large extent on what is happening in the dollar-based global economy. It should come as no surprise that the value of Bitcoin fluctuates in the same direction, but with greater volatility, than other risky assets.

I keep an open mind on whether Bitcoin may constitute a hedge against inflation in the long run. That may well happen as the value of fiat currencies erodes due to central bank policies of asset purchases and bailouts. There are no signs of this toxic nexus between central banks, government and financial markets ending any time soon.

The more central banks are feeding the beast, the greater the attraction of monetary assets with a built-in insurance against debasement. The West’s overuse of economic sanctions could accelerate this trend.

Inefficiency in finance

But I struggle to accept a narrative that explains the value of a cryptocurrency purely in terms of its guaranteed scarcity. Where I see value in Bitcoin, and other crypto currencies, is the promise to revolutionise money and finance.

Bitcoin allows transactions that would otherwise not be possible. It has been a more than reasonable store of value, but it is not a unit of account. It fulfils some of the three fundamental functions of money, but not all.

Finance is one of the most important, yet inefficient industries in existence. If decentralised finance can take out at least some of the wealthy gatekeepers and middlemen, it would improve the effectiveness and productivity of a sector that is so critical to the functioning of the modern economy.

We could make finance available to people who are cut off from it because of who they are or where they live. This would bring real gains. But if we, as investors, reduce our rationale to that of a pure speculative gamble based on scarcity, don’t be surprised that people like Munger look at it as a Ponzi game, and find words to describe it.

As for Munger, my view is that we should respect our elders, but not seek their advice on technologies with which they have not seriously engaged. Nor does it make sense for us to try to replicate investment strategies that worked at some point in ancient history.

Warren Buffett’s value investing constituted a form of information arbitrage that brought huge profits for a while. But that was long ago.

What I myself have learned from the many successful investors I have met is their refusal to follow academic fashions, their ability to think for themselves and to be comfortable outside of the consensus. Some, not all, of them are bullish on crypto. But they are not the fanboy types. The speed with which they get into something is matched only by the speed with which they get out.

True innovation

For me, the potential for financial innovation is crypto’s biggest promise. True financial innovation is rare. The introduction of fiat money was one. Paul Volcker, the former Federal Reserve chair, once said the only financial innovation in his lifetime was the introduction of ATMs. Crypto and artificial intelligence might be the two innovations of our generation. A younger Charlie Munger might at least have reflected on it with an open mind — as I have been trying to do here.

I myself have not yet drawn any firm conclusions. I don’t care so much about the price of an asset, but the uses to which it can be put. Therein lies its value. Even the faint promise of a reform of finance and money would be huge. Then again, so would be the dawning realisation that it might not happen.