You probably saw some of the heat investor Warren Buffett caught for saying he is not, and never will be, an investor in cryptocurrencies: "We don't own any. We're not short any. We'll never have a position."

Further, he shared with CNBC, "In terms of cryptocurrencies, generally, I can say with almost certainty it'll come to a bad end." He mentioned he's even expecting students visiting Berkshire Hathaway will ask him about Bitcoin.

There's a great article on Inc. from one of my fellow columnists on Why Warren Buffet Is Wrong About Cryptocurrencies.  As for me, let me say I love the innovations blockchain can bring to contracts, often using coins or tokens. I can get really excited about specific token sales that solve a real problem. Those are really specific situations, though--outliers, even.

This article is about why Buffett's right on investing in cryptocurrency right now, and he's incredibly right. (Plus, you never want to bet against Warren Buffett.)

He said it himself: "If you're buying something because it went up yesterday or last week, that is not a good reason for buying anything--that'll get you in trouble." The rise in cryptocurrencies, along with the rise of security issues and hacks, interest from the IRS, and potentially costly legal unknowns, have created a basket of headaches that make it much less investable than other options with less risk. 

Fortunes will be made--and lost--in Bitcoin and other cryptocurrencies this year.

And in real estate. And in gold. And in venture capital. So how do you minimize the risks and get on the side of the money-making? Partly by understanding the underlying value and having a fact-based opinion about where that value is trending. If you understand how a particular token or coin is going to change an industry you also understand well, you are in the perfect position to value the investment for yourself. In investing, that's called forming a thesis. If you're right, you make a fortune. If you're wrong, and all investors are wrong sometimes, you lose. Either way, you can at least track your thesis.

But most folks who are investing in cryptocurrencies don't have a thesis--they have an urge.

It's like Las Vegas. New tokens and coins are getting the cult-like adoration of a lucky slot machine. Financial blogger Peter Adenay made a good point in the Guardian, "When you make this kind of purchase - which you should never do - you are speculating. This is not a useful activity. You're playing a psychological, win-lose battle against other humans with money as the sole objective. Even if you win money through dumb luck, you have lost time and energy, which means you have lost." I'm not one to push away my share of dumb luck, but his point about speculating is still good.

Jackson Palmer, one of cryptocurrency's own insiders and the inventor of Dogecoin (pronounce it dodgey-coin and you get the joke), wrote recently of his frustration:

While FOMO-driven amateur investors rush to invest in the next "blockchain for x" ICO hoping for a 100 percent return, merchant adoption of Bitcoin is reportedly decreasing to its lowest level in years. Recently, major players like Microsoft and video game marketplace Steam removed the option to pay in Bitcoin from their online stores.

Cryptocurrencies are still evolving

As a currency, cryptocurrency's success is killing it. Stability is one of the most important characteristics of currency. Sellers have to be able to set prices with relative ease. Crypto is writing new rules on volatility. That makes it hard to manage price-to-value for any product that's denominated in digital. Plus, as a customer, you have to be willing to part with your currency. Many people who have cryptocurrencies prefer to hold, hoping the value will pop.

Cryptocurrency's aspirations to be currency are also being damaged by the insecurities of the technologies around it. Blockchain-based currency may be safe as houses, but the exchanges where you convert it into regular money sure aren't. The list keeps growing of exchanges that have been hacked, like Mt. Gox, Bitfinex, Youbit, and Nicehash. 

Another reason crypto's life as currency could be limited that bugs me (and probably just me) is that if quantum computers become a reality--given that right now they are a lab project--blockchain will look like baby math.

So Buffett's right that the current mania around crypto doesn't make investment sense.

People are mortgaging houses and taking out lines of credit to make sure they don't miss out. But the question is, why is now so important? With hundreds of new tokens and coins in the market, and more planned this year, is there a need to time the market? If you believe cryptocurrencies are here to stay and only beginning to prove their value, there's no urgency--just opportunity. Stay open-minded. Buffett's right to remind us to always invest in what we understand. 

Published on: Jan 18, 2018