It takes a lot for some people to admit when they are wrong.
No one is right all the time. I know that I’m not. Even Warren Buffett can humbly admit when he is wrong.
The outspoken critic of cryptocurrency, Warren Buffett, in fact, does invest in cryptocurrency and has for sometime indirectly through his Berkshire Hathaway holdings. That said, it does not mean that we can expect to hear him eating crow on crypto anytime soon.
The recent acquisition by Poloniex by the Circle only adds to a growing portfolio of investments inside of Berkshire Hathaway from their portfolio investments. Hopefully, as those cryptocurrency assets grow, we might have the “Oracle of Omaha” admitting he was wrong about crypto from the beginning.
Last year, Buffett described his regret for missing out on Google and Amazon during an interview on CNBC’s Squawk Box in 2017. Even oracles can be wrong sometimes and admit it. Warren Buffett’s majority holdings are in banks and other financial service companies.
Banks get crypto. Buffett does not — at least not yet. Maybe Warren Buffett will subscribe to CryptoChill, and I can help him out too on the journey of discovery around cryptocurrencies for his investment portfolio. I’ll show you how the recent acquisition by cryptocurrency startup the Circle of growing digital token exchange Poloniex is good for crypto and even bitcoin and digital currency naysayers like the Oracle of Omaha, Warren Buffett.
On Monday, February 26th, cryptocurrency startup the Circle announced their acquisition of token exchange platform Poloniex in a deal worth an estimated $400 million. The purchase is significant for several reasons.
First, its evidence of the consolidation that is beginning to taking place within crypto that has been on a holy-terror over the last few years with significant growth investments from both traditional funding and non-traditional funding sources within corporate financial services organizations, angel investors, venture capital, and private equity firms.
People that know and understand money, currency are investing in cryptocurrency, ICOs, and blockchain technology after doing their own due diligence get what is happening in cryptocurrency today. It would seem as if Warren Buffett’s history with Berkshire Hathaway portfolio investments in banking, currencies, and other financial services would make him an ideal investor in crypto.
So, why isn’t Warren Buffett a champion for digital currencies today? Good question. Let’s back up a bit. What do you know about Warren Buffet and his portfolio company Berkshire Hathaway?
If you just thought, “Who is Warren Buffett?” you might be young. I get it. All joking aside, Warren Buffett IS one of the world’s most well-known investors. He was a hedge fund manager in the early 1960’s. His investment partnership acquired textile mill Berkshire Hathaway in 1965, but later wisely pivoted the business into insurance to begin what has been decades of success for the Berkshire Hathaway shareholders.
During that 50+ year investing period, Berkshire Hathaway has made some mistakes. We don’t need to do a full autopsy of the last fifty years. One thing has been consistent. Warren Buffett does not understand technology investments and their related business model. Berkshire Hathaway and Warren Buffett have essentially missed out on much of the growth taking place in technology hubs like Silicon Valley over the last decade.
I’m certain they are not limited to missing just a couple episodes of HBO’s Silicon Valley–they have likely missed them all.
Missing the growth in technology sector with investments in Google (Alphabet) and Amazon is significant if we are now talking about a new technology with digital currencies and their related exchanges like cryptocurrency startup the Circle and Poloniex.
Recently while being interviewed on CNBC, Buffett was asked about bitcoin and cryptocurrency. Buffett said, “I get into enough trouble with things I think I know something about,” he added. “Why in the world should I take a long or short position in something I don’t know anything about.” So, Berkshire and Buffett need a little more knowledge around crypto.
Who is the Circle? Why does it matter?
From their investor page on the Circle site, they state that they are backed by $140 million in venture capital. “Circle is backed by $140 million in venture capital from investors including Goldman Sachs, IDG Capital Partners, Breyer Capital, Accel Partners, General Catalyst Partners, Baidu, CICC Alpha, EverBright, WangXiang and CreditEase.” Goldman Sachs was the lead investor and participated in the $50 million up-round that followed the $26 million in investments into Circle Internet Financial in 2013 and 2014.
The company stated at the time that they planned to use the cash investment in 2015 to expand their offering within their text-based application for financial transfers and payments. Their platform was limited to only digital currency transfers of bitcoin between users.
Moving into converting U.S Dollars to bitcoin or bitcoin to dollars for users, it would reduce their user’s exposure to volatile fluctuations in price from bitcoin which was commonplace at the time. This expansion will bring with it the security of insuring the converted dollars are backed by Federal Deposit Insurance Corporation (FDIC) protection for users as well.
Goldman Sachs’ investment in 2015 was considered a significant signal to the market of the value the financial sector was starting to place on bitcoin which at the time was experiencing substantial price swings between $200-$900 a bitcoin over the one-year period.
A number of related issues were impacting bitcoin, not the least of which were access to trading bitcoin in an open market and safeguards for consumers which Circle was prime to help solve with their platform for peer-to-peer payments for bitcoin.
If you look at the infographic below it demonstrates how Goldman Sachs was leading the larger banks and financial services businesses into digital currency investments with their investment into Circle in 2015 for bitcoin and blockchain startups. This trend should only continue, and we will naturally see mergers and acquisition activity in the space.
My favorite part of the Goldman Sachs-backed Circle acquisition of token exchange Poloniex is that Warren Buffett is growing his investments in crypto indirectly while he is questioning the growth on CNBC. Goldman Sachs gets crypto and blockchain technology. They are making investments in the area and will likely continue to do so.
But Warren Buffett has been a very outspoken critic of bitcoin and cryptocurrency when asked over the last several years. He has essentially publicly stated that the world’s most famous value-investor just does not get it.
As I’ve mentioned and Buffet has humbly admitted it is not the first time that Warren Buffett has not seen the light. He missed just about every significant move of technology investments during the recent explosive growth over the last ten years.
Until recently, Warren Buffett was a substantial investor in “Big Blue” IBM. In the last couple years though, he has unwound his position in IBM and has invested significantly in Apple to the tune of market adjusted valuation of $28B in Apple stock–up over 34% for the year. That is a very healthy return to his Berkshire Hathaway shareholders.
With returns like those, it is no wonder his shareholders listen to the Oracle from Omaha. Warren Buffett’s annual letter to shareholders is a newsworthy event each year–with the latest coming out at the end of February. The recent letter highlights his significant investment in Apple. Berkshire Hathaway now has a 3.3% stake in Apple.
While it is not his highest percentage ownership of outstanding shares in their portfolio, it is the second largest valued holding behind Wells Fargo bank. You see, Buffett is primarily known for his value investing in banks, insurance, and consumer goods like Coca-Cola. He admits that he likes simple business models where they produce a lot of cash annually and are profitable.
Technology investments like Google, Amazon, and now cryptocurrency markets have not made his list of investable opportunities.
After his 2017 letter to investors, Buffett was interviewed on CNBC’s “Squawk Box” and admitted that he and vice chairman Charlie Munger don’t always get it right.
“The investor humbly admitted that he and partner Charlie Munger miss a lot of things, and we’ll keep doing it.” In fact, to quote CNBC’s @AbigailJHess Buffett said, “he avoided tech stocks in the past because he didn’t understand how they were making money and whether they would be able to do so over the long term.”
Buffett’s Berkshire Hathaway invests in currencies; they just don’t invest directly in the new digital cryptocurrencies. If you look at his major holdings from the most recent newsletter, you might notice something. I did.
Above, you saw the financial service companies investments in bitcoin and blockchain technologies over the last several years. Berkshire Hathaway has investments with market caps totaling over $47B in financial services companies that have invested in bitcoin and blockchain–and that is not all of his holdings.
American Express at $15.056B Wells Fargo at $29.276B Goldman Sachs at $2.902B Warren Buffett invests in crypto. The most recent investment with Goldman-backed Circle acquiring Poloniex for $400M.
Just look at the infographic above showing investments by financial services in bitcoin and blockchain for signs of Buffett in bitcoin and blockchain.
Warren Buffett is a shrewd investor. Before the 2007 financial crisis here in the U.S. and abroad, his company Berkshire Hathaway was sitting on their highest percentage of liquid cash and equivalents at 16.2%.
By the time the financial crisis was beginning our current Bull Market the Berkshire Hathaway investment portfolio had dropped to a low of 7.2% in 2010 in reserves according to their annual report.
Today, they are sitting on a record amount of cash at $109B, or around 15% of their $665B in assets in their portfolio. Warren Buffett has stated that he is not in any hurry to invest that cash balance anytime soon.
Which could be serendipitous considering the current bull market is about nine years old, and true opportunistic value investors like Buffett have the benefit of buying while others might be selling when this bull market hit the pause button which historically happens after a 9-10 year run. The last bear market ended in March of 2009. We are currently in the second-longest bull market ever.
The October 1990 to March 2000 was the longest. To paraphrase the quote below from Buffett, be cautious when everyone is buying and buy when they are selling–buy on fear, sell on excitement. We’ve certainly seen a little of that with bitcoin and the cryptocurrency markets of late with the recent price volatility.
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” (Buffett quote from annual letter 2004)
Could bitcoin and cryptocurrency exchanges be an area Buffett and Berkshire invest in the future? Only the future will tell. Berkshire’s history of waiting for markets to develop does not scream an investment in digital currencies today.
Maybe the Oracle of Omaha does not get crypto just like he did not get technology–not enough historical data on the market fluctuations of these investments. That is okay, because his portfolio companies, Goldman, AMEX, and Wells Fargo do.
That certainly minimizes his risk of direct investments in the crypto market but also limits Berkshire’s upside. People listen to Warren Buffett and his vice chairman Charlie Munger. So, it would be significant if he understood and invested in cryptocurrencies.
They simply take an old-school approach to their investing and advice. In fact, Buffett and Munger still write letters to shareholders annually that people want to read about the past, present, and future.
In 2008, Warren Buffett invested in Goldman Sachs to help with the bailout. Berkshire Hathaway invested $5B in Goldman callable preferred shares and had additional warrants that gave them the right to buy an additional $5B worth of shares of Goldman.
In 2009 when things had turned around quickly for banks like Goldman, they purchased those shares back from Berkshire. Begrudgingly, Berkshire sold the shares back for a small 9-digit profit. The current shares came from the exercise of those warrants in 2013.
They have since reduced their holdings of Goldman in the last few years. What did Berkshire and Buffett miss out on during the same investment period by investing in what he knows (banking) and what he did not (technology)?
Goldman Sachs (GS Market Capitalization)
Google (Alphabet Inc. Market Capitalization)
Amazon (AMZN Market Capitalization)
Those are all respectable returns on the stocks–meeting (Goldman) and exceeding market averages over a 10-year period.
If you look at the Berkshire Hathaway website, you might see why Warren and Charlie might miss a few opportunities to invest in technology investments. Hey, Berkshire Hathaway website, the 1990s called and they want their web design back.
What you won’t miss from listening to Warren Buffett is that he is a disciplined investor.
As with any investing, you need to be disciplined and understand what type of investor that you are comfortable with being as you put your money to work. It is quite possible crypto may never be that investment directly for the portfolio at Berkshire Hathaway or Warren Buffett. Warren Buffett is one of the world’s most well-known investors.
So smart people listen when he talks about markets and investing even when he admits he doesn’t “know anything about (cryptocurrencies)” or even technology stocks like Google and Amazon when they are growing faster than the market averages. That might be changing for their portfolio as evidenced by his significant investment in Apple stock in the last year.
The man is a value investor after all, so extreme volatility in share prices are not his forte. The last few years when asked about cryptocurrencies the oracle has predicted a “mirage” that is going to cause things to “end badly for investors.”
While we have a different view here at CryptoChill on the future of digital currencies, only time will tell who was correct. While he does not have current plans to invest in crypto, Warren does not make all the decisions for his portfolio companies like Goldman Sachs who invested in Circle and now Poloniex.
After all, his holdings in Goldman Sachs is only 3%. His other portfolio holdings have fiduciary responsibilities to their shareholders. So, if American Express or Wells Fargo and others in their portfolio find that investments in crypto best maximize shareholder value, Buffett and Berkshire will benefit. Looking at the 10-year investment returns above, if you had a time machine would you go back in time and invest in Google, Apple, or Amazon?
It is not easy to admit you are wrong, but maybe this time Warren Buffett and the team at Berkshire Hathaway won’t be as wrong about digital currencies as they were about technology stocks since it has taken them almost 10-years to see that Apple was a valuable investment for their portfolio.
In fact, we might be wishing we could take a trip with Warren in that same time machine that was paid for with bitcoin on Circle to invest in cryptocurrency on Poloniex someday. Wouldn’t that be an interesting ride?