GameStop fiasco brings new appreciation for Warren Buffet's words on Bitcoin

Warren Buffet is famously quoted for calling bitcoin “rat poison squared” which is a very affectionate way to say it is pure speculation and has no inherent value to it. However, he also meant more. And perhaps now with this whole GameStop story, we can gain a better understanding of the poisonous nature of such ventures.

What we are witnessing now, is that stocks can be blown up into a massive bubble, completely void of true value relative to their price.

Without getting into all the reasoning behind what's going on, the bottom line is that a select group of stocks has been chosen to be blown up by groups on social sites, causing their prices to skyrocket without reference to any valuation metric or sensibility.

Now many will argue that this has no effect on the rest of the stock market and prove their point by showing how the rest of the markets had a horrible time while these stocks skyrocketed, so they are completely un-co-related.

And while there is truth to that argument on a basic level, in a deeper sense, however, the story does raise many questions about the validity of several other holdings that haven't gone up over the last few days but have seen tremendous growth over the last year/years.

These questions will come up as such tendencies continue to unfold. And these questions are one of the biggest fears of a long term investor.

You see, the stock market is priced based on multiples of earnings and profitability of companies. However who is to choose and say that right now 15 times earnings is a good metric, maybe 25 times earnings is the right metric to use? And for growth companies, 70 times earnings is fine, or maybe it's 200 times earnings? These are subjective at best. And therein lies the greatest fear of a long term investor. Are they overpaying based on the current assumptions being used as a multiple, only later to be informed that that multiple was too high?

When you see the current sequence of events, you can imagine where this will go in the future. Today the group on social media is hyped about GameStop and in the next weeks they'll move on to something else. Picking something to hype up and make a quick profit.

In essence, this has been going on for along time. In fact, there have for the longest time been such actors doing similar "work" in the penny-stock space. They would pump up a penny-stock only to dump it at a higher price and sell it short laughing at all their followers.

It seems that as long as those actors stayed out of the "real" stock market, it didn't affect the average long-term investor. However, current events can really be the trigger that will raise many questions for the long-term investor. Essentially bringing poison into the rest of the market where things do run on valuation metrics.

Herein lies the depth of what Warren Buffet was alluding to, calling Bitcoin "rat poison squared". Essentially this whole fiasco can potentially bring instability and turmoil to the rest of the market.