Believe it or not, Berkshire Hathaway is a concentrated stock with a high degree of geopolitical risk. Its positioning is risky, with heavy exposure in a handful of notably vulnerable areas today.
The solution is elegant and simple: Berkshire should purchase billions worth of Bitcoin.
In fact, we think it would be irresponsible for Berkshire not to do so. Buying Bitcoin would offset Berkshire’s concentrated risk and help the company fulfill its fiduciary duty to investors.
There is really no excuse. Berkshire Hathaway should own Bitcoin as a matter of safety and prudence. To not do so seems like a miss on the part of Warren Buffett.
This view might surprise you. Berkshire Hathaway, the American conglomerate hand-built by Warren Buffett? The diversified owner of multiple companies, with a portfolio as American as mom and apple pie?
Yep, that is the Berkshire Hathaway we’re talking about. And that is the Berkshire that desperately needs Bitcoin exposure — preferably $5 billion or $10 billion worth.
You’ll surely want more explanation, so here we go.
The “concentrated” part and the “geopolitical risk” part both come from Berkshire Hathaway’s unbalanced portfolio. Berkshire, at this point, is a leveraged bet on Apple stock — and Apple Inc. has major exposure to the increasingly ugly trade war unfolding between the U.S. and China.
Berkshire Hathaway’s gargantuan equity portfolio has more or less done terribly this year — except for Apple, which has made all the difference.
As of Aug. 8, the Financial Times reports, Berkshire’s Apple stake was worth $92 billion, which amounted to nearly half of Berkshire’s $207 billion stock portfolio.
Then, too, as a conglomerate, Berkshire Hathaway owns a broad and diverse cross-section of American businesses. And right now, business looks terrible.
In its latest earnings report, Berkshire’s manufacturing, service, and retailing businesses dropped 42%. Berkshire also booked a $9.8 billion write-down against a major acquisition, Precision Castparts, which was purchased for $32 billion in 2016.
Precision Castparts makes aircraft parts, power station equipment, and oil-and-gas machinery. Two out of three of those business lines look dead in the water thanks to the pandemic.
All in all, Berkshire is doing OK because of Apple. A rally in JPMorgan and Bank of America shares has also helped. But these bright spots are hiding significant turmoil and decline below the surface.
Then, too, Berkshire Hathaway is still sitting on a mountain of cash. As of the most recent quarter, the size of the cash mountain had grown to nearly $147 billion.
In response to the cash glut, Warren Buffett — the chairman, CEO, founder, and spiritual father of Berkshire Hathaway — is making decent-sized deals here and there.
In July, Berkshire did an oil-and-gas pipeline deal for nearly $10 billion. Buffett is also scooping up billions’ worth of Bank of America shares, while selling out of other names like Goldman Sachs.
In addition to that activity, Berkshire is buying back shares, a historically rare move. A $1.74 billion buyback in the prior quarter was followed up with a $5 billion buyback, a record amount.
This is where Bitcoin comes in. With all of that cash on hand, and all of those billions flying around, a purchase of Bitcoin in the multi-billion range, say $5 billion to $10 billion, would make perfect sense.
If anyone should understand the rationale here, it is Warren Buffett himself, a man who has made more money from the insurance business than anyone else on the planet.
The logic is simple:
- Berkshire Hathaway carries significant geopolitical risk by way of its $92 billion Apple stake. (If the U.S.-China relationship gets ugly enough, Apple sits directly in the crosshairs, via significant business in China and core manufacturing in China.)
- Berkshire Hathaway carries a heavy load of systemic financial risk, thanks to its large positions in the major banks (JPMorgan, Bank of America, Wells Fargo, and so on). The likelihood of a new bank crisis is low, but it isn’t zero. Questions loom around “CLOs,” shorthand for Collateralized Loan Obligations, and exposure to busted commercial real estate loans.
- Berkshire Hathaway carries another form of systemic risk exposure through its ties to the U.S. economy. The conglomerate has so many lines of business, a full-on economic collapse would potentially crush Berkshire (indeed, early hints of this are showing up in the numbers).
- Berkshire Hathaway carries significant currency risk, simply by way of holding almost $147 billion worth of cash. As the U.S. dollar gets debased, and potentially subjected to capital flight, Berkshire could see the value of its cash holdings significantly eroded.
- Bitcoin is a natural and elegant hedge against every single one of those risks.
It is unlikely Berkshire owns or would ever actually consider Bitcoin, of course, because Warren Buffett has repeatedly gone on record as a Bitcoin hater. He memorably once called it “rat poison squared.”
Then, too, Buffett’s strong aversion to Bitcoin was foreshadowed in his longtime aversion to gold. Buffett has despised gold for decades, finding various ways to declare gold useless or pointless.
Gold has no value because it doesn’t produce cash flow and doesn’t yield anything, Buffett has been known to say. So, it is natural for him to put Bitcoin, a form of “digital gold,” in the same bucket.
It is true that gold yields nothing. But neither do other forms of crisis insurance, a product Berkshire has sold for decades.
If you own a beach house, and you want a policy to protect against hurricanes, you don’t judge a policy by its cash flow (which is zero). You judge it by the protection it affords, and the cost of that protection in the form of premiums.
Bitcoin should be considered in the same light. Bitcoin could not only serve as an elegant insurance policy for Berkshire, it could generate a hefty capital gain while doing so.
An insurance policy with excellent responsiveness to danger, a large payout in the event of catastrophe, and “positive carry” — the phenomenon of generating a return, rather than costing a premium to hold — is practically the holy grail of investment assets. Bitcoin qualifies as such.
If Berkshire Hathaway wanted to buy, say, $5 billion to $10 billion of physical gold today, it is doubtful they could do it. Physical gold is in extreme shortage right now. The physical bars are hard to attain.
But billions worth of Bitcoin could be purchased with no problem. If Berkshire were to buy, say, $5 billion worth of BTC/USD, it would cost less than 5% of Berkshire’s total cash pile (which continues to grow via operating earnings).
And yet, with that modest Bitcoin purchase, Berkshire could have an almost perfect hedge for all of the risks embedded in the Berkshire portfolio.
Bitcoin exists “outside” the financial system, both literally and figuratively.
As such, if the financial system implodes, Bitcoin will skyrocket as a kind of “escape from Armageddon” wormhole to safety.
Or, if the U.S. economy falls into a second Great Depression, triggering supernova-level currency debasement as fiscal dominance overwhelms everything, Bitcoin will explode in value as well.
Or if the banks fall into crisis due to commercial lender exposure and ticking time bomb CLO risk? Once again, any type of “blow-up” will cause capital to flee the system — which means fleeing into a safe-haven asset outside the system, which is Bitcoin.
And speaking of “fleeing the system,” guess which asset sees the most benefit from China capital flight, as wealthy Chinese investors try to smuggle money out of the country?
And guess which asset is likely to benefit most if the rate of capital flight intensifies on a heightened U.S.-China war of words, or something even worse? Actually, don’t bother guessing — we already know it’s Bitcoin.
In terms of Berkshire Hathaway’s current set of exposures, a $5 billion to $10 billion investment would be deeply prudent and rational for Berkshire even if Bitcoin wound up doing nothing at all.
That is because, at the end of the day, the value of an insurance policy is not measured by whether the crisis happened or not. Of the homeowners who insure their beach houses, nobody gets mad at the end of hurricane season when no hurricane shows up.
In probability-versus-payoff terms, Bitcoin is excellent insurance — even if it doesn’t pay. And that reality is coupled with the likelihood of “positive carry,” meaning a net positive return on any Bitcoin position held, along with the non-trivial possibility of a multiple-orders-of-magnitude return.
Imagine a scenario where the collective value of Berkshire’s share portfolio and conglomerate holdings are written down by $150 billion — and yet their single multi-billion Bitcoin position, bought as a form of insurance, winds up offsetting all of that and more.