Excellent Book: Charlie Munger For All Seasons
There was this conversation involving Warren Buffett, Charlie Munger and Bill Gates on bitcoins. Warren Buffet judiciously stayed on the sidelines. So, between Charlie Munger and Bill Gates, who’s right?
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Host: I just had to get your thought on Bitcoin, this… this… this digital currency that’s out there that people say, oh it might be the next big thing. What do you think?
Charlie Munger: I think it’s rat poison.
Warren Buffet: Put him down as undecided.
Host: Do you understand what they’re trying to do with it?
Charlie Munger: No, but I regard it as deeply flaky.
Host: Deeply flaky, OK, Bitcoin – Bill, what do you think?
Bill Gates: I think it’s a technical tour de force, but that’s an area where governments are gonna maintain a dominant role.
Host: Bill, Warren?
Warren Buffet: I think either Charlie or Bill is right.
Host: Either one of those guys.
First of all, a little bit of background on bitcoins. Bitcoin is a cryptocurrency which is a digital asset functioning as a medium of exchange. Bitcoins were started in 2008 by a person or persons under the assumed name of Nakamoto. It could be the works of a programmer or group of programmers. The mystery remains till now.
Bitcoins are based on blockchain technology with its distributed ledgers and are secure by design. For example, in a layman (myself included)’s terms, if a fraud can be committed by changing two ledgers simultaneously, some might be tempted to try if they can get away with it and especially if they can get away with it. How about having to change two ledgers simultaneously or a million ledgers simultaneously? Still this begs the question whether how secure is “secure by design”. So far nobody has come up with a 100% guarantee that bitcoins are safe. Further, there are true horror stories of people losing their pants and more in bitcoin investments through fraud, operator errors, inherent risks, volatility and exchange closures.
So, against this backdrop, who is right: Charlie Munger or Bill Gates?
Actually both of them are right. Bill Gates is right. As a medium of exchange, bitcoin can be a technical tour de force if there are sufficient safeguards to make it workable. Then again, can you program a software that is unhackable?
Charlie Munger is right too. At present, there are just so much uncertainty and inherent risks surrounding bitcoins that you’d be a fool to invest your life’s earnings on bitcoins. Remember Charlie Munger 101: no need to be smart, just don’t be stupid. However, if you wealthy or a bitcoin hobbyist, it is quite alright to put in a negligible sum to test things out. I think Mr. Charlie Munger meant what he said as a general rule. If you are selling rat poisons to farmers who need to get rid of the rats marauding the rice storage, it’s a legitimate business.