Having fallen by over 80% in less than 18 months, it has been an incredibly challenging period for holders of Bitcoin. Of course, some mainstream asset prices have also experienced disappointing levels of performance during the same time period. The S&P 500 and FTSE 100, for example, have come under pressure after reaching record highs. But the scale of the fall of Bitcoin has been truly exceptional.
In such scenarios, it can be worthwhile to consider how a successful investor such as Warren Buffett would react. Although he is famed for being a value investor who is tempted by falling prices, when it comes to Bitcoin it may be a different scenario.
Wealth accumulation
One of the key facets of Warren Buffett’s investing career is that he has invested in businesses which have created significant amounts of wealth. Whatever the industry, his holdings have been made up of successful businesses that have been able to put capital to use in an efficient manner in order to generate rising levels of profitability.
In contrast, holding an asset such as Bitcoin does not lead to wealth creation, or the efficient use of capital. In other words, an investor seeking to profit from Bitcoin would simply buy it, and then aim to sell it to someone else at a higher price. In between the buying and selling of the asset, there has been no wealth created or efficient use of capital. It is merely an asset which is traded from one person to another.
Opportunity cost
As such, value investors such as Warren Buffett are unlikely to be anymore interested in buying Bitcoin after its 80%+ fall than they were while it was trading close to $20,000 in the latter part of 2017.
In fact, Buffett has apparently stated that ‘it is better to jump ship, rather than go down with a sinking ship’. While not said while discussing Bitcoin, the general quote could be applied to the virtual currency at the present time. It lacks real-world usage potential due to limited size and infrastructure challenges. Therefore, it is difficult to see how it can justify its current valuation, since it is entirely dependent upon investor sentiment. Since investors now appear to be downbeat about its outlook, it may be prudent to sell up and invest in other assets over the long term.
Growth opportunities
As mentioned, indexes such as the FTSE 100 and S&P 500 have come under pressure in recent months as fears surrounding the global economy have increased. As such, sellers of the cryptocurrency may be able to capitalise on lower valuations for high-quality stocks. Since there are concerns surrounding the prospects for the world economy, Warren Buffett’s penchant for ‘being greedy when others are fearful’ could hold particular relevance when it comes to buying stocks at the present time.