Heed Warren Buffett’s warning: bitcoin is pure FOMO

To the surprise of nobody, billionaire investor Warren Buffett isn’t interested in bitcoin, the electronic currency that has zoomed higher in value over the past few weeks.

Bitcoin BTCUSD, -1.12% BTCF8, -1.24% is a complex idea. Simply put, it’s a virtual currency that is created, owned and traded entirely online in anonymous and unregulated settings. In theory, there is a limited number of these physically non-existent digital “coins,” though that limit hasn’t yet been reached. A few years ago, bitcoins were almost worthless; earlier in December, bitcoin’s valued briefly topped $19,000.

Buffett is having none of it. "You can't value bitcoin, because it's not a value-producing asset," he said recently. Earlier, in 2014, when bitcoin was worth much, much less, Buffett said, "Stay away from it. It's a mirage, basically,” adding, “The idea that it has some huge intrinsic value is just a joke, in my view."

So what drives the value of an essentially value-free asset? FOMO — fear of missing out.

The real danger

Who buys a home expecting it to double in value in a year? Who buys an unproven web startup certain that it will disrupt an entire industry in short order?

Think back to the housing bubble and, before that, the dot-com stock bubble. There was a time, early on, when these investments were nearly worthless.

Yet investors pounced on dot-coms and fixer-uppers. They feared missing out on a chance to get rich quickly.

As with dot-coms and real estate, the fuel driving the bitcoin fire is the continual entry of new investors, more and more people motivated by FOMO, fear of missing out.

This can happen to even large stocks, of course. Nearly every asset class has its heady moments. Yet stocks bounce back, over and over, thanks to Buffett’s notion of intrinsic value.

So what is intrinsic value? Imagine you buy stock in a company, say, Coca-Cola KO, -0.59% .

Huge numbers of people around the world consume Coke products. They pay cash, billions of dollars of cash, to buy and drink it. Whatever the value of drinking Coke might be, millions of people do so every day.

Now subtract the cost of making Coca-Cola, which is sugar, water and a few other ingredients, and you have a real stream of profits.

Waterfall of cash

Intrinsic value is this continuous waterfall of cash. It’s not the stock price of Coke but the actual cash flow of the business, after costs.

Buffett made his billions by divining when the gap is greatest between intrinsic value and a stock’s share price, then buying loads of shares, tickets to real cash flow other investors would want.

Given that bitcoin is supposed to replace cash, what is the ultimate source of cash flow from digital coins created on the internet? It’s dollars flowing from the pockets of buyers who want to own those coins.

Cut off the supply of new investors and the bitcoin craze ends.

The fact is, bitcoin has no intrinsic value at all. While many digital coin “investors” would argue that neither does a dollar, I counter that just about nobody thinks of American cash as an investment, except for perhaps currency speculators.

Rather, dollars are a temporary store of value, a means of transmitting that value from one person to another. As Buffett says, valuing bitcoin is like trying to value a paper check drawn on a bank. Pointless.

“But Mitch,” you might counter, “bitcoin is different. It’s a revolutionary new idea.” Sure, and it’s also an unregulated international marketplace rife with fraudulent actors. Just ask the Securities and Exchange Commission.

There is just one reason that bitcoin’s price currently is hovering around $15,000 rather than zero and that’s FOMO, plain and simple.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

Read more:

• Bitcoin is changing hands for $24,000 in Iran, based on the “Official” exchange rate
• Tendayi Kapfidze: “bitcoin is a pyramid scheme
• Want to Invest in Crypto? Think About Buying Stocks
• According to this rumor: A single Bitcoin whale was responsible for the astronomical price hike in 2017
• Libra faces strong opposition and China embarks on a race to launch its own global cryptocurrency