Noelle Acheson is a veteran of company analysis and a member of
CoinDesk’s product team. The opinions expressed in this article are the
author’s own.
The following article originally appeared in Institutional Crypto
by CoinDesk, a free newsletter for institutional investors interested
in cryptoassets, with news and views on crypto infrastructure delivered
every Tuesday. Sign up here.
Justin Sun, founder of the Tron blockchain, has paid $4.75 million for the privilege of having lunch with legendary investor Warren Buffett.
News outlets around the world picked up this news, trumpeting it as
yet another example of how ridiculous the crypto sector can be.
The gesture is attention-grabbing, true, and not just because $4.75
million is a lot to pay for a meal and a couple of hours of someone’s
time. It’s also worthy of a jaw drop given Buffett’s public opinion of bitcoin: “probably rat poison squared” is one of his more colourful descriptions.
However, the real event here is being overlooked. Thanks to Sun’s
largesse, two extremes of the current investment landscape will sit at
the same table and talk to each other. This is more significant than
most of us realise.
A rich buffet
First, let’s look at the extremes that these two ambassadors represent.
Warren Buffett is CEO of Berkshire Hathaway, a U.S.-based conglomerate with over $700 billion in assets, including a handful of large enterprises in insurance, transport and consumer goods, a portfolio of minority holdings in household names such as Coca Cola and Wells Fargo, a sizeable equity portfolio, and over $110 billion of cash equivalents.
One of the richest men in the world, Buffett made his fortune
investing in solid companies with definable markets and tangible
profits. He has often said that he doesn’t invest in businesses he
doesn’t understand, and it wasn’t until 2011 that he took his first stake in a tech company, IBM, a position that did not do well. In 2017, he bought shares in Apple, which now accounts for the largest position in his equity portfolio. And last month, he revealed a small holding in Amazon.
At the other end of the table, we have Justin Sun, an experienced
entrepreneur and former Ripple representative, who has built a large
ecosystem around a global entertainment platform based on a distributed
storage blockchain. Not exactly in Buffett’s wheelhouse, especially
since the main use case so far seems to be for gambling, something Buffett has spoken out against in the past.
Tron has been criticized for its outlandish publicity stunts, questionable governance and even plagiarism. In spite of that, however, the network’s token TRX has amassed a liquid market cap of over $2 billion, placing it in the top 10 of crypto assets.
Can you think of two more different lunch partners?
Round table
Now let’s pick our jaws up off the floor and look at what this meeting represents.
On the one hand, it’s a master publicity stunt for Tron and could
well end up being cheap at the price. Sun’s name has since graced
headlines in mainstream press around the world. While the tone of the
reporting may be of incredulity and perhaps even scorn, his name has
appeared in the same sentence as Buffett’s in every single article. The
two are now associated in the minds of not just investors who read the
financial press, but also of a good part of the world’s population.
On the other hand, it’s also good publicity for Buffett, not that he
needs it. Affectionately referred to in many outlets as “America’s
favorite capitalist,” Buffett has come under criticism recently for his underperformance of the S&P500 over the past 10 years, in spite of handsome outperformance for the previous 30, and for having totally missed the tech boom.
With this lunch, the proceeds of which will go to charity, Buffett has shown himself to be gracious and generous. Several well-known commentators tut-tutted
that they wouldn’t want to be in his shoes, but Buffett issued a public
statement through a spokesperson saying that he was looking forward to
the opportunity. Buffett is far from stupid and may well be intrigued by
the chance to hear about a totally foreign concept from one of its most
high-profile promoters.
This brings us to where this meeting might lead.
Take out
No-one expects Buffett to emerge from the meal a converted crypto
evangelist. If he has struggled to understand tech companies (as he puts
it) and their focus on revenue growth at the expense of profits, then
it’s very unlikely he will appreciate the value in a new type of asset
that has no tangible backing, no defined governance and no established
income streams.
Nor will it produce a Buffett-backed investment in crypto, even as an
experiment. Berkshire Hathaway is a public company and its annual
general meeting is a massive event, with over 40,000 people
travelling from far and wide to question the board on their investment
decisions. Imagine them having to justify putting shareholders’ money
into “magic internet beans.”
What’s more, Buffett has in the past highlighted how hard it is to
find viable investments with so much money on hand. The number of listed
equities in which he could feasibly invest is limited to around 100,
simply because of liquidity concerns and operational considerations.
With over $700 billion of assets under management and over $100
billion of “dry powder” (cash that needs to find a profitable home),
even a $1 billion investment that produces a 500% return in one year
won’t be enough to “move the needle” on the portfolio’s overall
performance. Smaller investments, no matter how enticing, are not worth
the hassle. And a larger investment in even the most liquid of crypto
assets would send the market reeling – not something a smart investor
would do.
Leave a tip
The ideal outcome of the lunch is actually the most likely: that
Buffett is less dismissive of the concept of crypto assets than before.
This is likely because Buffett recognizes that he has made mistakes in dismissing entire sectors before. “We blew it,” is how he explained his lack of tech investments so far. Given his personal emphasis on lifelong education, we can expect him to at least listen to Sun.
And it won’t just be to Sun. The entrepreneur’s bold statements,
confusing business strategy and apparent lack of concern for regulatory
issues (see the interview
our editor-in-chief Pete Rizzo did with him on the main stage at
Consensus 2019) will most likely mean that Buffett won’t take him very
seriously. But Sun is allowed to invite seven other guests and will
hopefully choose ones that can explain crypto assets’ role in the
evolution of finance with clarity and sobriety. Virtually all of Crypto
Twitter has been jostling for position.
Sun is likely to choose well, since association with leading crypto
thinkers is part of the stunt. While the rest of us will fantasize about
being a fly on that wall, we can be fairly confident that the
conversation will be both dense and conceptual.
We can also marvel at the genius of the idea. Whatever you may think
of Sun, Tron and the outlook for decentralized entertainment, there is
no way that this move doesn’t help the crypto sector. Worst case,
Buffett is unmoved and continues to think bitcoin is a “delusion.” From what I gather, his opinion could not go lower than it already is.
Best case, Buffett emerges with an acknowledgement, however
reluctant, that maybe there’s more to this than he realized. That would
send a strong signal to institutional investors everywhere that
dismissal without at least some investigation is short-sighted and
foolish.
Total victory would be for Warren Buffett to publicly recognize that
he doesn’t understand enough about cryptocurrency to have an informed
opinion… yet.
source link
