For decades, successful investor Warren Buffett has been waxing philosophical about the wisdom of buying whatever you intend to purchase. His business philosophy has always focused on buying sound investments with a certain amount of patience.

The one area in which he has been notably unenthusiastic is with regard to digital assets.

So let’s examine what goes on if Bitcoin turns out to be one of the hottest investments around just at the moment when one of the world’s most successful investors has chosen not to buy in. Does this mean that he was right not to have bought any?

It certainly makes one think about the decisions that Warren Buffett makes regarding Bitcoin.

Buffett Saw Bitcoin as Something Without Intrinsic Value

Buffett has challenged the very notion of value creation potential of Bitcoin because, unlike a company, it does not generate revenues, dividends, or produce anything.

His argument is reasonable when one analyzes an investment from a classical perspective.

When one buys a successful company, it can make profits and pay dividends.

Those profits can be reinvested or paid out to investors and enable value appreciation.

This is not the case with Bitcoin.

The cryptocurrency’s value depends almost solely on the demand for it.

Demand for it is fickle and, thus, its value is also fickle.

This renders analysis and valuation almost impossible using classical financial models.

However, let it be known that the controversy surrounding the matter is far from over.

Bitcoin Doesn't Need to Be a Company to Have Value

Bitcoin proponents would say that drawing comparisons between a business and bitcoin is entirely missing the point.

Gold does not generate revenues either,

but people have been investing in gold for centuries due to it's scarcity, durability, portability, divisibility and relative inconvertibility.

Bitcoin follows in the legacy of scarce assets, only the supply of bitcoins will never exceed 21 million.

It is this characteristic, along with others, which give credibility to the idea that Bitcoin is a hedge against inflation and devaluation of money.

Whether or not this theory holds true remains to be seen

but there is no doubt that this idea has influenced millions of people.

The Early Bitcoin Opportunity Was Easy to Ignore

This may be the biggest lesson of all from Buffett’s performance.

Bitcoin was simply not on the radar of many investors for good reasons.

It was born in the Internet chat rooms of programmers and technologists and was initially dismissed by mainstream finance as a gimmick.

There was no familiar establishment to endorse or regulate it, no track record, and no simple way to value it.

Its volatility was breathtaking.

So, avoiding it was actually the conservative thing to do.

But then again, so was missing out on the extraordinary returns of assets that had gone mainstream and appeared reasonably valued at the time of purchase.

Bitcoin's Biggest Advantage: Scarcity + Network Effect

The main strength of Bitcoin is not just the fact that its price is growing.

It is the whole network around it.

There are millions of people all around the world who know about it, exchanges, financial institutions, investors, and companies that are involved in it.

The more people that know about it and are a part of the network, the bigger it is.

Which doesn't necessarily mean that it will continue to grow

but it shows that it had real potential to become what it is now; something that few people knew about before but is commonly known now and is a huge part of the market.

But Calling Bitcoin “The Best Investment” Is Still a Risky Claim

Here's the section many articles about Bitcoin conveniently leave out

Bitcoin is incredibly volatile.

The price can skyrocket, yes, but it can also crash.

It has no cash flows from which one might calculate some fundamental value, as one might with an income-producing business.

Investors should consider their exposure to this asset class in very different terms than they might otherwise.

You could believe, deep in your bones, that the price will eventually go up

but have little ability to withstand the inevitable declines along the way

The crucial question, then, isn't "Will the price of Bitcoin go up?" but rather "Are you prepared to withstand the periods when it won't?"

Maybe Buffett's “Mistake” Wasn't Ignoring Bitcoin

Perhaps Buffett's decision wasn't a mistake at all.

Maybe it simply reflects a different investment philosophy.

Buffett prefers assets he can understand and value through business fundamentals.

Bitcoin belongs to a new financial category — one based on cryptography, decentralization, scarcity and network adoption.

You don't have to believe Bitcoin will replace traditional money to recognize that it has created something significant.

And you don't have to reject Buffett's philosophy to acknowledge that the world is changing.

The Real Lesson for Investors

The Bitcoin Versus Buffett debate is not about choosing sides

it is about recognizing one crucial investment principle:

Never confuse "I do not understand it" with "it has no value."

Furthermore,

never confuse enthusiasm with knowledge

Every generation gets the opportunity of a lifetime in investing

sometimes they make it, sometimes they do not.

Bitcoin could define the 21st century as we know it

or it could fizzle out and become a footnote in financial history

Nobody knows for sure, and that is why it is important to be both curious and cautious as an investor.

Final Thought

Warren Buffett became one of the most successful investors by focusing on fundamental analysis and defying the crowd.

Bitcoin represents the anti-investment philosophy.

The cryptocurrency is extremely volatile, unconventional and its fair value is hard to estimate.

Perhaps, Buffett is right to avoid it.

Perhaps, he will finally recognize his mistake as Bitcoin continues to defy the conventional wisdom.

In any case, a heated argument between Buffett and Bitcoin is educational.

It shows that the most rewarding opportunities often come disguised as the most ridiculous ideas.

This is an informational article, and should not be taken as an investment recommendation. Investing in cryptocurrencies carries high risk, and may lead to losses.