Crypto: The Wild West of the Financial World

In recent years, the US has seen a proliferation of privately owned companies issuing thousands of new cryptocurrencies, both large and small. These cryptos have gone on to become publicly traded without any prior governmental approval or disclosures.

Charlie Munger, vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett, believes that the lack of regulation in the US has led to some concerning practices in the crypto market.

America Should Ban Crypto

According to Munger, large blocks of cryptocurrency have been sold to promoters for next to nothing, only for the public to then buy in at much higher prices without fully understanding the dilution that took place in favor of the promoter. This has drawn comparisons to the old mining industry, where a “mine is a hole in the ground with a liar on top,” as the saying goes.

Cryptos are caught in a regulatory grey area, not classified as a currency, commodity, or security. It can be seen as a gambling contract with a nearly 100% advantage for the house, entered into in a country where gambling contracts are only regulated by states with varying levels of laxity. Muguer claims that it’s clear that a new federal law is needed to address this issue.

Two historical events may offer guidance for the way forward. The communist government of China recently banned cryptocurrencies due to concerns about the harm they may cause, while in the early 1700s, England reacted to a depression caused by a promotional scheme that involved slow sailing ships trading with poor communities around the world.

In response, the English Parliament banned all public trading in new common stocks for nearly 100 years. During this time, England made some of its greatest contributions to civilization, leading both the Enlightenment and the Industrial Revolution, and eventually gave birth to the United States.

With a ban on cryptos in place, it’s suggested that the US consider thanking the Chinese communist leader for their wise example of sound judgment.

Sitting on Cash

A recent report by Bank of America revealed that investors remain cautious when it comes to the stock market, holding nearly $5 trillion in money market funds. Berkshire Hathaway, the investment firm led by Warren Buffett and Charlie Munger, is one of those American firms that is currently sitting on billions of dollars in cash, despite a bullish pivot seen in January 2023.

Source: Google Finance

In a recent interview, Charlie Munger explained that the reason for this is not because he and Buffett are waiting for stocks to get cheaper, but because there simply isn’t anything worth buying.

Munger, who has never hoarded cash in his adult life and has always invested in the best opportunity he could find, stated that Berkshire Hathaway and other major financial institutions are limited in their ability to invest. By law, these institutions and billionaire investors can only purchase up to 5% of a company without facing regulation from the Securities and Exchange Commission.

This regulation effectively shuts Berkshire Hathaway out of the world of microcap investing, as the regulatory hurdles can be too burdensome to make it worth their while. Even if they were to go through with it, the potential rewards would likely be negligible for a company that collects hundreds of millions of dollars in dividends each year.

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