Free Markets, Regulation, Charlie Munger, and Bitcoin

To investors,

Charlie Munger has one of the best investing track records in history. He, along with his partner Warren Buffett, have been able to compound capital at an astounding rate for decades. On top of their incredible track record, Charlie and Warren have helped educate an entire generation of investors on the merits of value investing, long-term thinking, and the discipline of patience in an impatient world.

It may surprise many of you to learn that I actually have a bronze bust of each of these investors on a desk in my office. They were a gift years ago from a friend and each serves as a reminder that long-term thinking, along with compound growth, can drive extraordinary results.

It is no secret that both of these investing legends are not big fans of bitcoin or cryptocurrencies. They have previously called the assets rat poison, referred to trading crypto as equivalent to harvesting dead baby brains, and a multitude of other eloquent digs at the technology and community. This shouldn’t be surprising to anyone who follows their work — neither investor likes gold or other non-cash flow producing assets. Charlie Munger and Warren Buffett have built their wealth by investing in operating businesses that throw off cash, so bitcoin doesn’t fit that framework.

With this context, it makes sense that Charlie Munger would write an op-ed on February 1 in The Wall Street Journal that takes a negative perspective on the industry (Why America Should Ban Crypto). But the points that Charlie made were quite surprising. First, he claims that these assets are not currencies or securities, but rather gambling contracts:

“Such wretched excess has gone on because there is a gap in regulation. 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, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity. Obviously the U.S. should now enact a new federal law that prevents this from happening.”

Next, he claims that the United States should ban cryptocurrencies in the same way that communist China and 1700s England banned certain assets.

“Two interesting precedents may guide us into sound action. In the first precedent, the communist government of China recently banned cryptocurrencies because it wisely concluded that they would provide more harm than benefit. And, in the second precedent, from the early 1700s, England reacted to a horrible depression that followed the blow up of a promotional plan to get vast profits by using slow-moving sailing ships to trade with very poor people halfway around the world.”

The idea of banning new technologies or markets that threaten the incumbents is not new. Those in positions of power and influence have been trying to use regulation and law as a tool for centuries. If we look at Berkshire’s portfolio today, there are numerous financial organizations in their top 20 holdings who are threatened by the rise of bitcoin and cryptocurrencies (ex: Bank of America, American Express, US Bancorp, Bank of New York Mellon, and Citigroup). That is 25% of their top holdings that are in direct competition with the new technology.

There is more to this story though…...