For years, Coca-Cola Co. (KO 0.39%) It has been one of Warren Buffett’s favorite stocks. He often talked about why Coca-Cola was such a great investment. As a result, Coca-Cola has become a symbol of Buffett’s long-term, value-based investment philosophy. Coca-Cola is the kind of stock you buy and hold forever.
Buffett, on the other hand, doesn’t like it at all Bitcoin (BTC -4.79%). He called it “a mirage” and “rat poison squared” and even suggested that he wouldn’t buy all the Bitcoin in the world for $25. Obviously, Buffett would never even entertain the idea of adding Bitcoin to his investment portfolio. But Coca-Cola and Bitcoin may be more similar than you think. Let’s take a closer look at some of Buffett’s arguments in favor of Coca-Cola and see if they apply to Bitcoin.
An iconic brand
A major part of Coca-Cola’s appeal is that it is an iconic brand that is instantly recognizable around the world. There are many different drinks out there, but Coca-Cola has become a uniquely American brand that inspires the loyalty of its fans and the admiration of its investors.
Bitcoin is also an iconic brand, but in a different way. Ask a random person on the street the name of a cryptocurrency and they will probably say Bitcoin. The orange Bitcoin logo – just like the red Coca-Cola logo – is instantly recognizable. Bitcoin was the first cryptocurrency and stands alone in any ranking of cryptocurrencies. Much of the lingo we use in the crypto world – like “buy and HODL” (HODL is crypto lingo for “hold”) and “buy” – is derived from Bitcoin. Many of the ways people talk about Bitcoin — for example, “Bitcoin is digital gold” — remind me of Coca-Cola’s great advertising slogans for more than 100 years.
The best player in the industry
Coca-Cola did not become the world’s largest beverage company by accident. He did this by creating an almost impenetrable moat for his opponents to break through. It has a world-class distribution network and a world-class brand team. Moreover, it has a management team focused on increasing profits and shareholder value. All this made Coca-Cola very attractive to Buffett.
Bitcoin is certainly not a company, so we need to adjust our mindset to be the best player in the industry. The top cryptocurrency will, of course, have the largest market capitalization. It would also be the most widely used as a payment option and the most trusted by institutional investors to put in their portfolios. Bitcoin meets both of these conditions. Bitcoin may not have a management team, but it does have an algorithm. And this algorithm carefully monitors how many coins are in circulation and accurately describes how coins can be created in the future. Just like Coca-Cola regularly pays out dividends, Bitcoin regularly adjusts its rewards to miners.
What is a fair valuation for Bitcoin?
This is where things get tricky when it comes to pricing. While everyone agrees that Coca-Cola is more or less fairly valued based on metrics like price-to-earnings ratio, almost no one can agree on Bitcoin’s valuation because cryptocurrency is still so new. Some say that the value of Bitcoin is going to zero, while others say that the value of each Bitcoin is going to $1 million.
Every time Bitcoin hits an all-time high, skeptics immediately come out and say it’s not sustainable. But then it rises even higher. Remember when Bitcoin broke the $100 mark for the first time? Back in 2013, it seemed both remarkable and fantastical. By 2020, Bitcoin had already surpassed Coca-Cola in terms of market capitalization. Now we’re talking about $20,000 – roughly the current price – as a potentially fair valuation for Bitcoin.
Is Bitcoin the Cryptocurrency Forever?
That doesn’t mean Bitcoin will ever appear in Buffett’s investment portfolio. Or Bitcoin has the same risk-reward profile as Coca-Cola. Or that Bitcoin has any of the same fundamental dimensions as Coca-Cola. Of course not.
However, I don’t think that one day we will talk about Bitcoin as the “cryptocurrency forever”. It will be a cryptocurrency you buy and keep forever, just like Coca-Cola is a stock you buy and keep forever. Bitcoin will likely be the first cryptocurrency that many investors own. If you’re thinking about buying Bitcoin, just remember a piece of classic Coca-Cola advice: “You can’t beat the real thing.”
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool recommends the following options: Long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.