Warren Buffet was right that bitcoin is “rat poison squared” but not for the reason most people think
This isn’t a lesson about a good or bad investment – it’s a lesson in what good investing is really all about.
Time to read: 10 minutes
By now, you should know that I like to open my posts with questions to get the juices flowing. And today, to no surprise, is about investing:
How would you define investing?
Or maybe what’s the point of investing? Is it to get the highest return? To achieve your desired outcome or goal?
If we define it by the return we achieve, what makes for a good return?
Is a 10% return a good return? More importantly, how do you know?
How you think about and how you answer these questions will very likely determine how you make investment decisions. And, to be direct for a minute, if you don’t have clearly defined answers, I would highly recommend you make the time to find them.
Now, let’s talk about Buffett, bitcoin, and investing.
In the world of finance, few names resonate with the impact of Warren Buffett (the Oracle of Omaha). Known for his sage-like investment wisdom, Buffett's views often serve as a barometer for what good investment decisions should look like.
Quick fun fact: How much of Warren Buffett’s wealth was created after the age of 65?
The answer: 99%.
“His skill is investing, but his secret is time,” Morgan Housel
In 2018, Buffett’s labeling of bitcoin as "rat poison squared" stirred significant debate, but beyond the surface of this statement lies a deeper lesson about perspectives in investment and life choices.
Let's unravel this narrative, keeping in mind that the essence of any investment lies not just in its inherent, or perceived, value, but in the lens through which we view it.
Decoding Buffett’s investment playbook
Every year, Buffett writes about his perspectives on investing in the Berkshire Hathaway letter to shareholders. He shares thoughts from the last year and life lessons he has learned over time. If you have not read it (or them), do yourself a favor and check them out. You can find his letters here.
I started reading them religiously a few years back and I quickly learned that while his stories and lessons may change, his approach to investing does not. Buffett has a very clear investment strategy (sometimes called an investment thesis).
At the heart of Buffett's investment philosophy is a preference for companies with three things:
Good business models,
Good management, and
Good cash flow
Easy right? Now you’re ready to be a legendary investor. You can thank me later.
The problem? It’s not that easy.
His approach is less about fleeting trends and more about sustainability and long-term value. Buffett famously opts for investments he would be comfortable holding for ten years rather than ten days (which feels even more contrarian in today’s world and the rise of social media). This strategy underscores a commitment to fundamentally sound businesses, a principle that steers clear of speculative ventures.
Quick point: When you hear about people buying and selling to try and capture market trends, remember that these people are traders and speculators (in my opinion). They are not investors like you and me. Investors trying to build long-term wealth are more like Warren Buffett - they think and act more like business owners (i.e. they think about creating long-term value).
Enter rat poison … excuse me, bitcoin
When we apply Buffett's framework to bitcoin, the lack of alignment is quite obvious. Let’s compare his investment thesis to bitcoin:
Good business models - Bitcoin (and its currency bitcoin) doesn’t have a traditional business model. In fact, the entire thesis around the creation, and value, of bitcoin is unproven.
Good management - Due to its decentralized nature, it is not governed by a management team that can pivot strategies or influence growth.
Good cash flow - bitcoin doesn't generate revenue or cash flow. It exists as a digital asset whose value is driven largely by market sentiments and speculative interest (at least for now). In short, bitcoin doesn’t pay a dividend.
Through Buffett's investment lens, bitcoin understandably resembles "rat poison," lacking the fundamental qualities he values not only in a single investment but in his overall investment philosophy.
This isn’t about dismissing bitcoin, cryptocurrency, or even blockchain as innovative ideas or concepts that may change the way we develop networks, build businesses, or even pay for goods and services. But it is very much about understanding how successful people think about investing and building wealth, and, maybe more importantly, how they determine what NOT to do with their money.
Full disclosure, I am a big believer in what all of this (crypto and blockchain) can potentially do for society, and I am also thoroughly convinced that no one truly knows what this will ultimately become in the years and decades ahead. So when someone tells you, with absolute clarity, what bitcoin and crypto will become, please remember that no one really knows.
The right answer depends on the question being asked
Buffett's perspective, while valid from his vantage point, is not a universal truth, but it does underscore a critical lesson: the validity of an answer is often tied to the quality of the question asked. Buffett views bitcoin as unsuitable within his investment framework, which is heavily anchored in traditional business metrics.
Based upon his question – ‘what business should I invest in?’ – his answer is right - ‘bitcoin is not a business and therefore not a good investment’.
However, for others, the question might not be about business models or cash flows but about potential for innovation, market disruption, or even personal beliefs in decentralization and digital currencies. And, for others, bitcoin is gold in digital form and has inflation fighting properties (amongst many others). And, for some, it holds the possibility of a get rich quick scheme.
It’s important to emphasize that none of these ideas are proven. They are all theories at this stage in the game so there is very real risk in betting on these things to be true. So be careful who you listen to and the level of conviction you form based upon their beliefs.
Before you make an investment decision, you should have clarity around the questions that will guide your choices, and those questions should be tied to why you are investing in the first place.
Where are you hoping your money, and your investments, will take you?
As the saying goes, if you don’t know where you’re going, any road will take you there.
Reframing your investment narrative
Buffett’s stance on bitcoin doesn’t mean it’s the one that you have to believe in and follow, but it does teach us one of the most valuable lessons we can all learn about investing. Simply because you can invest in something doesn’t mean you should. Having a clear framework or investment strategy that supports your financial plan, goals, and comfort with risk should always be your starting point.
As I have been telling my clients and members for nearly two decades, ‘don’t chase returns, follow your plan.’
This is hard advice to follow sometimes, especially as Nvidia is ripping right now. (“ripping” is a technical term for posting pretty crazy returns).
We can learn much from Buffett's wisdom and it goes far beyond bitcoin. For me, it’s a lesson in creating the life I want to live, defining the role I want money to play in it, and then asking what financial decisions align with and support that life.
So if we revisit those questions from the beginning:
How would you define investing?
Or maybe what’s the point of investing? Is it to get the highest return? To achieve your desired outcome or goal?
In general, investing is defined as allocating resources (e.g. money) to various assets (e.g. stocks/businesses, real estate) with the expectation of achieving a gain/profit, an income stream, or both. In short, we want our money to make money so we have more of it in the future.
To me, this is only a partial definition. The purpose of investing is to put money away intentionally today to make the life I want tomorrow possible. The process is what I shared above. And the payoff is building wealth (an amount of money or an income stream) that allows me to achieve financial freedom.
Now for the second set of questions:
If we define it by the return we achieve, what makes for a good return?
Is a 10% return a good return? More importantly, how do you know?
A good return needs to be measured against the level of risk you are taking. A higher risk investment should provide a higher return and a lower risk investment should provide a lower return. A “good’ return can only be determined when measured against the level of risk you took to achieve it. The best investors can measure and manage their risk and can quickly determine if their strategy is appropriately rewarding them or not.
A little bonus content…because I believe in full transparency and you should know what I do with my money (it’s rare that people will share this and I think that needs to change).
My Strategy: A thesis, limits of risk, and conviction
I own 1 bitcoin. I bought it for around $20,000. Keep in mind that I am a Certified Digital Asset and Blockchain™ advisor and that I have spent hours, if not days, with investment managers and tech experts and hundreds of hours of self study on all things crypto. However, despite all of this time spent in this space, I can’t find true clarity around what this “thing we call crypto” is really all about and, more importantly, how it will drive value for me as an investor.
So here is how I approach this:
An investment thesis: Key point, this is how I invest not just my money but my time. My perspective on investing is that it’s much bigger than most people think.
My principles:
Invest in myself first, always. I am my greatest asset and that will give me the greatest return on life (way more important than just my investments).
Invest in my relationships - family, friends, co-workers, people in my community, etc. Relationships matter, trust me. Don’t believe me? Check out the Grant study.
Invest in my own businesses and ventures - I have owned two businesses and started one (my current company Facet). Building a business and working with amazing people has been one of the most rewarding experiences of my life.
Invest in the global economy with the goal of owning everything in a low cost, tax efficient, and diversified manner - This is what you might hear called index investing.
Invest in some “fun stuff” to remain mostly rational - Yes, I allow myself to invest in what I call non-core opportunities (bitcoin being one). Remember, the goal of investing isn’t to be perfect. It’s to be mostly rational, most of the time.
*Note: I don’t subscribe to the typical definition of “passive investing” as it creates the wrong narrative. Yes, the investments I use in my accounts and overall portfolio are exchange-traded funds (ETFs) that are passive in nature. However, my overall strategy is proactive, ongoing, and always evolving. That doesn’t mean I am changing my investments, but I am always revisiting my strategy from my cash flow to my emergency fund and high yield savings to the accounts that I invest in (401k, Roth IRA, HSA, taxable account, etc) to how much I invest to how I manage my taxes and so on.
Those principles define my overall investment thesis and how I make investment decisions. My core investments aren’t sexy, but they work for my strategy (i.e. they are more Vanguard and less crypto or Gamestop). If I decide to pursue a non-core investment, I always set a limit of investing (say 1% to 5% of my overall investments), determine my level of conviction, decide how much I am willing to risk, and then I take action.
That’s how I decided to own 1 bitcoin, and it’s a very small percentage of my portfolio. I love what crypto stands for, but I have never heard the same answer about what it is, what it will become, or how to value it across my network. And, because I am still a believer in the power of businesses, I only put a very small portion of my overall portfolio in bitcoin.
Also, I am entering a new chapter as a father, and I can’t justify buying more bitcoin when I think about other priorities like saving for my daughter’s education.
And if you don’t know the difference between Bitcoin and bitcoin, please…don’t invest in crypto.
And now for Thinking Time:
Speaking of better questions: I was once considering an investment of $100,000 in a new business in my home town. The question I asked was “Is this a business and an idea that I want to support?” My answer was a clear “yes.” A good friend of mine reframed the question and asked,
“Would you rather put this $100k towards this business or put that money towards a college education for your daughter?”
Talk about different questions that can completely change your perspective.
When we get clear on our questions and our values, the right answer will come. But always remember the quality of the question (what’s the point of investing?) will determine the quality of your answer (how you actually invest).
Cheers to health, wealth, and the good (financial) life,
Brent