Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin
While no one can definitively say where the next financial bubble will occur, Nobel Prize-winning economist Richard Thaler says he’s avoiding making this particular investment: bitcoin.
Thaler, known as the “father of behavioral economics,” is a vocal skeptic of bitcoin as a currency. In a new episode of the Freakonomics Radio podcast, Thaler tells host Stephen Dubner that when it comes to investing, he follows billionaire investing mogul Warren Buffett’s simple advice.
“Warren Buffett says a lot of smart things, and one of the things he says is, don’t make investments in things you don’t understand,” Thaler says. “And I have no clue [when it comes to bitcoin].”
Bitcoin is just one of many forms of cryptocurrencies that are used as digital currency and are accepted by a select amount of businesses and merchants, but is not considered legal tender in the U.S. Bitcoin is also currently the world’s most valuable virtual currency by market value, trading at more than $6,700, according to industry website CoinDesk, which tracks prices from several exchanges.
Thaler notes that although the U.S. has taken action to make big banks more stable since the 2007 financial crisis, he doesn’t understand why people would invest in a volatile currency like bitcoin. Though it was once valued over $19,000 at its record high, Thaler says he doesn’t think “that the intrinsic value of bitcoin is worth thousands of dollars.”
“‘Stay away’ is the best advice,” says Thaler.
In 2014, Buffett also warned people to stay away from bitcoin, calling it a “mirage”:
It’s a method of transmitting money. It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? Are money orders? You can transmit money by money orders. People do it. I hope bitcoin becomes a better way of doing it, but you can replicate it a bunch of different ways and it will be. The idea that it has some huge intrinsic value is just a joke in my view.
This year, Buffett made clear that his opinion on bitcoin and other cryptocurrencies remains the same: “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” Buffett said, later referring to bitcoin as “rat poison.”
Nobel Prize-winning economists Robert Shiller and Joseph Stiglitz have echoed these sentiments, warning that the rise of cryptocurrencies resembles a bubble and that the anonymity of bitcoin can lead to “nefarious activity.” While some people have profited off of their investment in bitcoin, billionaires such as Bill Gates, Jamie Dimon and Mark Cuban are cautious to recommend it.
“I don’t know why anyone engaged in strictly legal activities would want to use a currency that is so volatile,” Thaler says.
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