Charlie Munger’s disgust for crypto was political. But I’m keeping an open mind

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. 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, the late vice chairman of Berkshire Hathaway, said this. He hated cryptocurrencies 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 serious investors should take his comments seriously.

And yet, Munger was one of the greatest investors of his generation.

Instinctive investors

Suffice it to say, he did not spend much quality time considering the merits and demerits of Bitcoin and other crypto assets, which he all 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 all 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 mind more often than the facts change. This is how I can tell that Munger’s disgust of crypto is not about investment. No investor of his calibre would ever be so categorial.

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 is about politics. He hates the idea of any form of payment systems that exist outside the control of governments. And he is 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 a flurry of applications by BlackRock and other big asset managers to offer a spot Bitcoin ETF, combined with a shift in market sentiment on inflation. The US had good inflation data in October that prompted a wider market reassessment on interest rates.

Macro forces at work

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 re-shoring 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 in November last year, 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.

Reasonable store of value

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 sanction could accelerate this trend.

But I struggle to accept a narrative that explains the value of a crypto currency 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.

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.

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.

Fanboy types

What I myself have learned from the many successful investors I have met, is their refusal to follow academic fashion, 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.

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 late Federal Reserve chairman, 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.

Open mind

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.