Thursday, January 11, 2018

The Warren Buffet 5 year cryptocurrency Put option

In 2017 crytocurrencies went mainstream. The start of trading in Bitcoin futures alarmed Thomas Peterffy because there is no reason that Bitcoin could not keep shooting up in price, making clearing impossible and bringing the international financial system into peril.

Billionaire investor Warren Buffett told CNBC yesterday that the recent craze over bitcoin and other cryptocurrencies won't end well.

"In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending," the chairman and CEO of Berkshire Hathaway said.

"When it happens or how or anything else, I don't know," he added in an interview on CNBC's "Squawk Box" from Omaha, Nebraska. "If I could buy a five-year put on every one of the cryptocurrencies, I'd be glad to do it but I would never short a dime's worth." 

Puying a Put option would give you the right to sell at a certain price in the future. Below are the prices of the 10 largest cryptocurrencies by market cap. Buffett would like to buy the right to be able to sell you these coins at these prices in 5 years. His assumption is that he could buy them much more cheaply sometime between now and January 10th 2023 and then profit on that day.

$14,661 Bitcoin
$1,333 Ethereum
$2.04 Ripple
$2,648 Bitcoin Cash
$0.77 Cardano
$0.57 Litecoin
$1.49 NEM
$0.57 Stellar
$3.59 IOTA
$1,090 Dash

Would you be willing to sell such Put options to Buffett?

One of Buffett's main points (the trick) is that cryptocurrencies are like digital golden eggs, that don't by themselves create anything else. They don't create a profit or cash flow. It is better to own "money making machines" or geese that lay eggs, than money. As Buffett puts it: "You cannot value Bitcoin because it is not a value creating asset." 

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

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