Applying Warren Buffett's investing wisdom to crypto

• Buffett & Time Preference
• Buffett & Impatience
• Buffett on Risk
• When it rains gold, put out the bucket

Warren Buffett, one of the world’s most respected investors, is reported to have described Bitcoin as ‘probably rat poison squared’. Though on that basis it is safe to say that the Sage of Omaha isn’t a fan of Bitcoin, as a crypto investor you’d be wrong to ignore his advice on investing in general. When looked at through a crypto lens, many of his most famous quotes actually provide very solid advice.

Buffett & Time Preference

One of the most crucial concepts to understand if you’re considering investing in crypto is time preference. The Learn Crypto blog has dedicated a whole article to the topic, but the TLDR is that people with low time preference delay gratification in the short term in order to enjoy a greater benefit in the future.

Hodling is the term Bitcoiners use as shorthand for delayed gratification. It's about ignoring the drama of daily price charts, and setting your time preference years into the future, trusting in Bitcoin’s sound money characteristics and the benefits that will bring. 

All this chimes precisely with Buffett’s advice on investing:

Someone’s sitting in the shade today because someone planted a tree a long time ago.

This is actually a version of a Greek proverb “A society grows great when old men plant trees whose shade they know they shall never sit in” and is talking directly about time preference. 

In fact, this theme runs through many of Buffett’s most famous quotes, suggesting his investing mentality has a lot more in common with Bitcoin that you might think:

Our favourite holding period is forever

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years

Here just replace stock for your favoured cryptocurrency:

If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes

Buffett & Impatience

Time preference and hodling is linked to another important meme within the crypto community - strong hands. 

Again Buffett has shared several aphorisms that match the strong hand meme. Most famously:

The stock market is a device for transferring money from the impatient to the patient

Just replace the word stock with Bitcoin or crypto, and the logic is no less sound.

Buffett On Risk

Buffett’s description of Bitcoin as rat poison might be attributed to the fact that he simply has done enough research into it. DYOR - do your own research - is another key crypto meme, and when it comes to thinking about trading crypto, the knowledge curve is even steeper.

If you're not prepared to put in the time to understand what is involved, the best approach is to think about mitigating risk and difficult decisions about market entry points, through what is known as cost averaging. 

Learn crypto provides a lot of information on cost averaging and again, this chimes with a lot of what Buffett has to say.

If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.

Risk comes from not knowing what you are doing

Experts & Hindsight

If you decide that you aren’t happy, as Buffett puts it, ‘spending six to eight hours’ or possibly more, researching technical analysis and the wider macro economy, that doesn’t automatically mean you should simply defer to experts.

Experts may be more knowledgeable than the average market observer, but they're not paid to be right, they're paid to give advice and insight, usually asked to explain the reasons for asset performance, rather than to accurately predict them. Predictions, one might say, are only as good as the last one, and easy to arrive at.

There are plenty of opinions to be found on social media, and you should be careful who you place faith in. Here again, Buffett has some worthy advice:

Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.

There are plenty of false crypto prophets, many are well-intentioned but not informed, while many others are neither informed or well-intentioned and will try to convince you that they have information worth paying for. 

The truth is that trying to make sense of the complex dynamics of the crypto market can inevitably lead us to defer to those we feel are more informed, or worse, to view what moves price through the benefit of hindsight. 

Buffett has some words of wisdom here too, that are worth thinking about. Just replace ‘business’ with bitcoin:

In the business world, the rearview mirror is always clearer than the windshield

When it rains gold, put out the bucket

Though a lot of Buffett’s quotes are about prudence and common sense, he didn’t become one of the world’s richest men without knowing when to grasp an opportunity with both hands.

Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.

Many people firmly believe that Bitcoin is digital gold, while the wider crypto economy that it has inspired represents a huge potential wealth transfer, with few industries left untouched. 

If you’ve done your research and believe in the potential that Bitcoin and crypto present, you can disagree with Buffett’s rat poison assessment, but agree that this might be a generational opportunity worthy of a bucket not a thimble.

Or, if you agree with Buffett, you can at least acknowledge that there is something a bit more to Bitcoin than he may have known at first. And you never know when he himself might change his mind -- it was in 2020 when he made a remarkable U-turn about his belief in gold, dumping bank stocks through his company Berkshire Hathaway to take positions in Barrick Gold, a top gold mining firm.

After all, one does wonder what he ever did with the one bitcoin he received as a gift in the same year he chose gold over stocks...