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Back to the basics with bitcoin: Ron Insana

"The historical track record of old white men who don't understand technology crapping on new technology is, I think, 100 percent." Marc Andreessen commenting on Warren Buffett's description of bitcoin as a "mirage."

As a middle-aged white man, I fall somewhere in between, age-wise, Warren Buffett and Marc Andreessen, the former is arguably the most savvy investor of the last century, the latter a very savvy tech investor of the last 20 years.

Tomohiro Ohsumi | Bloomberg | Getty Images

The debate over the future of bitcoin has intensified of late as some, Buffett and myself included, are doubtful that a digital currency like bitcoin is built to last, as opposed to being "bulletproof," as described by Andreessen.

Read MoreAndreessen vs. Buffet: Bitcoin miracle or mirage?

What strikes me as problematic in Marc's criticism of Buffett is that while Buffett fully admits that tech is not his game, more specifically, he doesn't believe he is capable of identifying long-term winners and losers in a rapidly evolving space, is that Andreessen ignores Buffett's thorough understanding of money, which bitcoin purports to be.

Just as a refresher, money is defined by having three intrinsic properties:

  • A unit of Account
  • A medium of Exchange
  • A storehouse of Value

In the history of money, it is true that many vehicles have served those purposes ... load stones, salt, seashells, coins, bank notes, scrip, and, here at home today, Federal Reserve notes. As bitcoin strives to become a world currency that owes no allegiance to a sovereign nation, it behooves us to remember that in the modern history of money, (since the 1600s, or thereabout), there have been only three global reserve currencies … The British pound, The French franc (very briefly) and The U.S. dollar. The euro desires to take its place among the reserve currency of the world, as does the Chinese yuan, neither of which are likely to supplant the dollar anytime soon.

The U.S. dollar still accounts for over 65 percent of all global transaction volume and is not going away, even if bitcoin finds a place in the modern payments system.

Indeed, in today's economy, the dollar itself, is virtually a digital currency, since cash is often replaced by an electronic deposit system that automatically deposits your paycheck into your bank account and you then use those electronic dollars, via a debit card to purchase goods and services. While not a cashless society, we are well on our way to becoming one.

The current problem with debit, and credit, cards, though, is the cost of using them. Swipe and transaction fees mean that the use of your own money costs you, and sometimes dearly, simply to withdraw funds or purchase goods.

Now, bitcoin has a noble goal of eliminating those "frictions" in the system, so that the cost of transacting business, on a bitcoin platform, is zero.

Read MoreBill Miller: I'm a bitcion owner

Bitcoin also promotes anonymity, a feature both desirable and dangerous, at the same time.

Bitcoin enthusiasts argue that there are nefarious uses for the U.S. dollar in the drug trade, on the black market, and in other areas where secrecy is the coin of the realm, just as opponents warn of bitcoin. However, given the transparency of the U.S. banking system and increasing international coordination of "following the money," it is becoming more and more difficult for bad actors to use the banking system as a means of financing illicit acts. In our post-modern, technology-driven world, however, a world fraught with threats of terrorism facilitated by money-laundering and other illegal acts that are aided and abetted by anonymity, such discrete transactions, facilitated by cryptocurrencies, could be a danger to civil society.

The impact of that has yet to be thoroughly felt or explored.

But the real problem with launching a new currency, particularly one that is not backed by anything but algorithms, is subject to cyberattacks and cybertheft (think Mt.Gox), and could even become vaporware in the event of some global disruption to the power grid, is the "mirage' that Buffet talked about. In the Mt.Gox case, one minute the bitcoins were there, the next, $850 million worth was gone. (A quarter of that was recently discovered in a "digital wallet," but the bulk remains "missing." As a consequence, and rather ironically, digital currency exchanges are now, reportedly, building underground vaults, maintaining physical ledgers and saving hard drives in order to ensure the safety of their digital dollars.

One should note, however that we already have such a system that safeguards gold, the dollar and the payment system, which is quite sophisticated and secure.

Let's call it the Federal Reserve, an institution that digital currencies shun, despite the obvious need for an overseer, guarantor and facilitator.

Fundamentally, though, to me, the most basic conceptual flaw in the creation of a cryptocurrency, however, is twofold:

1.) There is no economy, interest rate regime, nor other means of valuing the currency that allows it to maintain the required characteristics of money. As we have seen, the lack of legitimate backing has caused extraordinary swings in the value of bitcoin, the type of volatility that inhibits widespread use due to a lack of stability.

2.) Most important, though, is that governments don't like to give up the power to coin, or print, money. Note the recent IRS decision declaring that bitcoin is "property" and not "currency." The repercussions of this decision are manyfold and could, ultimately, kill this infant in its crib, so too the People's Bank of China forcing institutions to abandon dealings in bitcoin.

Read MoreThis is sending bitcoin investors fleeing

I will side with Buffett on this one, old and white though he may be. What Andreessen failed to note in his criticism is that the road to technological innovation is littered with young white men who, in the 1990s, launched thousands of public companies aimed at remaking the world. Some succeeded, but many failed for the lack of respect for some time-honored tenets of how to build a business. Buffett knows money and its history. It would probably pay to listen to him.

Ron Insana is a CNBC and MSNBC contributor and the author of four books on Wall Street. He also delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.

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