Is Charlie Munger Right About Crypto? Is Bitcoin a Delusion and a Fraud?
R Tamara de Silva
In an op-ed in yesterday’s Wall Street Journal, the legendary investor and vice chairman of Berkshire Hathaway, Charlie Munger, called for the U.S. government to ban cryptocurrency for being, to paraphrase, a worthless bubble akin to tulips, the South Sea bubble or the Mississippi Scheme.
All this wild and wooly capitalism is much like that described in a remark often attributed to Mark Twain, who was thought to have said that “a mine is a hole in the ground with a liar on top.”
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.[1]
The crypto world was quick to respond largely by mocking Mr. Munger’s age -suggesting that no one, at the age of 99, would be expected to understand cryptocurrency. Other comments dismissed the op-ed pointing out that gambling was 100% gambling too, and still not outlawed. The third most common criticism of Mr. Munger’s statements was that if Communist China did it, it cannot be right. The jingoist shade aside, China represents the second largest economy in the world, seeming to prove that democracy is not needed for capitalism to thrive.[2]
The first argument is not just ageist but surprising considering that Charlie Munger has a net worth estimated to be in excess of $2.5 billion and is said to read more books in a month than most people who read do in a decade. [3] in terms of track records, for over 50 years, Charlie Munger has been Warren Buffett’s right hand man, and vice chairman of the Oracle of Omaha’s publicly traded conglomerate, Berkshire Hathaway (NYSE: BRK-A).
Virtual Currencies and Nation States
Let’s start with some basic definitions. Virtual currency is an electronic means of exchange. It can be used to purchase goods and services or in exchange for other currencies. Cryptocurrencies are either centralized or decentralized.
There is still (at least as of this writing) only one virtual currency that has been issued by the central bank and considered the legal tender currency of a sovereign.
Several countries are thinking about it though. For example, in December 2017, Venezuela’s President Maduro announced plans to launch a new digital fiat currency, the ‘‘petro,’’- a decentralized currency backed by oil reserves and oil commodities. The petro was launched in early 2018 and said to have raised $3.3 billion-something of value to a government crippled by sanctions and whose native currency, the Bolivar had been devalued by 95% at the time due to inflation reminiscent of the Weimar Republic. The problem is that the petro was not circulated within the country, nor listed on any large cryptocurrency exchange leading some skeptics to call the entire venture, a scam.[4]
The Marshall Islands is also pursuing the launch of a cryptocurrency, the ‘‘Sovereign’’ (SOV).
Central Bank version of crypto?
There are a handful of government central banks that are considering digital fiat currencies backed by the state. A central bank digital currency (CBDC) is a digital form of the central bank’s fiat or printed currency that is available to the general public and is also a liability to the central bank.
CBDC may or may not be decentralized (on a blockchain platform) but would be considered legal tender as they are issued by the state. For example, Sweden’s central bank, the Riksbank, is considering the ‘‘e-krona.’’ The motives are to maintain control of payment systems and also because there has been a decline in the use of cash. [5]
And the taint of FTX aside, the Bahamian government launched the Bahamian Sand, the world’s first digital currency issued by a government central bank.
The Benefit of Decentralized Currency like Bitcoin (BTC) v CBDC
CBDC seems a betrayal of the promise of decentralized currency-the freedom, if you have custody of your own cryptographic keys (self-custody), to hold something of value that cannot be taken away by anyone; by government sanctions or civil forfeiture (something I have written about here). This promise also allows you to take an enormous amount of money with you. As opposed to being able to transport the equivalent amount of money in the form of real-estate or gold, which would be impossible when the amounts in question become sufficiently large. Try carrying $400 million in gold on a flight.
There is also the risk of a government devaluing a central bank currency by attaching regulations to it. Perhaps, as it has been said, the one thing worse than a large inefficient bureaucracy is a very large extremely efficient one. For example, what if your opposition to funding the Ukraine war or some other government policy, which you foolishly share on Facebook or Twitter, leads to sanctions on your digital currency for spreading false information?
This would be akin to China’s current social credit system where the government, through the use of private companies, cuts off Chinese citizens from being able to board an airplane, take out a loan or buy property because an individual is deemed socially untrustworthy. What if, like a credit score which impacts your ability to borrow, there is a social credit score, where your online and social media activity is monitored (it is) and this impacts your financial life? It is not that difficult to imagine the leap from the disapproval of speech, to its sanction. What happens if large private companies partnered with the government affect policies wherein your commercial relationships with them impact your digital currency? Forget about buying more time to pay your late cell phone bill before your digital currency is appropriated. The latter example of private companies working through the state may seem like rank paranoia unless you are a student of history.
What Charlie Munger may be right about
BTC may not be the virtual currency that becomes adopted on a mass scale for the same uses as conventional currency, which are as a store of value and as a medium of exchange. Perhaps the dominant digital currency has yet to be thought of. It may be too early to ascertain who becomes the dominant cryptocurrency.
It looks like it is BTC now but BTC is not without issues that affect its adaptation as a general purpose and wide spread means of exchange. For example, the amount of energy used to mine it is relatively high, miners can go bust; there are scalability issues as the transactions take time; and latency, et. Al.
The problems with centralized virtual currencies are many. Crypto does not have the same benefits as BTC when you have to use centralized custodians. The centralized custodians, often in the form of cryptocurrency exchanges, take custody of your funds and you have only the terms of service to assume will protect you as there is usually no insurance on your deposits, there are proof of reserves problems, and a general and persistent lack of transparency. Even assuming proof of reserves were not so fraught with issues, without knowing the liabilities of a centralized cryptocurrency exchange, this information may be meaningless.
Centralized cryptocurrency exchanges (“CEX”) imitate traditional centralized trading exchanges but without any of the protections and benefits of traditional and regulated centralized trading exchanges. Certainly without any regulation that would even ask for checks and balances, transparency, and the segregation of customer funds.
There is also the axiom, “not your keys, not your crypto,” a topic I have written about it here.
Not all Crypto is the Same
Does the fall of FTX and other centralized cryptocurrency exchanges Genesis and Block-Fi, mean that digital assets and virtual currency writ large are akin to the tulip bulb craze? Not necessarily. Despite its volatility, BTC has grown dramatically in value since its issuance. BTC’s mathematical scarcity supports its use as a store of value. Many of the largest institutions on Wall Street have already invested in it.
Could BTC in theory go to zero? Yes, but so could many other investments. Lets remember that the price of crude oil went negative.
It would be an error to conflate all virtual currencies. Ultimately, it is only time that will tell which ones stick around. It is too early to dismiss an industry that though nascent, has already become increasingly popular with institutional investors such as family offices, large multinational banks, and high net worth investors in the U.S. Europe, and especially Asia.
On October 2021, the first BTC ETF launched, attracting $570 million at launch. Mastercard, Visa, PayPal and Morgan Stanley enable the use of cryptocurrencies for the users and clients. The aforementioned institutional interest is not just a retail trading frenzy but perhaps suggestive of a trend toward the mainstream adoption of cryptocurrency as a means for the exchange of value…like you know, currency.
R Tamara de Silva
Endnotes:
[1] Charlie Munger, February 1, 2023, Why America Should Ban Crypto; It isn’t currency. It’s a gambling contract with a nearly 100% edge for the house. WSJ, Opinion https://www.wsj.com/articles/why-america-should-ban-crypto-regulation-economy-finance-china-england-trading-currency-securities-commodity-gamble-11675287477#comments_sector
[2] https://tradingeconomics.com/
[3] https://www.forbes.com/profile/charles-munger/?sh=58bdb420697a
[4] Brian Ellsworth, ‘‘Special Report: In Venezuela, New Cryptocurrency Is Nowhere To Be Found’’, Reuters, August 30, 2018; Katia Moskvitch, ‘‘Inside the Bluster and Lies of Petro, Venezuela’s Cryptocurrency Scam’’, Wired, August 22, 2018.
[5] 64Gabriel Soderberg, ‘‘Are Bitcoin and Other Crypto-Assets Money?’’ Economic Commentaries No. 5, Riksbank, March 14, 2018; and ‘‘The E-Krona Project, Report 2’’, Riksbank, October 26, 2018.
[6] https://communications.fidelity.com/pdf/institutional-investor-digital-assets-study-report.pdf