Be Fearful When Others Are Greedy, Buffett Warns On Cryptocurrencies


Legendary investor and chief executive officer of Berkshire Hathaway, Warren Buffett, is on record as having said that in the markets it is wise to exercise caution when everyone else is acting greedily. His exact words were ?Be fearful when others are greedy and greedy when others are fearful.?
It should therefore have come as no surprise when earlier in the year Buffett said that there will be a bad ending for virtual currencies. At the time he made the statement Bitcoin (BTC) had a few weeks prior just hit a record high and there was feverish excitement in the sector with more and more people piling in to invest in digital currencies.

Optimistic forecasts

During that period predictions were made that Bitcoin would hit a high of $100,000 before the end of this year. While the price of Bitcoin was around $14,000 at the time it is now hovering below $7,000. Other virtual currencies have also fallen drastically. This was not the first time that Buffett was dismissing virtual coins as he also raised the same concerns he has over them in 2014 when he called Bitcoin a ?mirage?.
By urging investors to be fearful when others are greedy and greedy when others are fearful it has been explained that Buffett meant that when there is greed in the market prices tend to rise dramatically as everyone wants a piece of the action. The reason Buffett advises caution during such a time is the fact that purchasing an asset then the price is likely to be high and one will thus overpay, a fact which will lead to anemic returns in future. However when market players are acting overcautiously and everyone is fearful, the price of assets is likely to be depressed and thus one is likely to get value for their money if they buy.

American Express

Examples of Buffett employing his strategy include the case of American Express. In the 1960s the stock of financial services company fell by half after a scandal was discovered where collateral that had be used was found to be non-existent. After undertaking a review of the business model of the company Buffett decided that there would be no material impact on the moat of American Express and thus invested in the stock. In the next half a decade the value of American Express had increased five-fold.
By warning against virtual currencies it is clear that Buffett does not see any ?American Express? in the sector that he would willingly invest in. However not all famed investors who come close to being compared to Buffett are heeding his advice and keeping away from digital currencies. Soros Fund Management, an investment fund that was started by George Soros, is for instance making plans to engage in the trading of cryptocurrencies. Per Bloomberg reports, the head of global macroeconomic investing at Soros Fund Management, Adam Fisher, has received approval to make investments in virtual currencies as well as trade in them. The amount of funds that Soros Fund Management currently manages is around $26 billion.

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