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Eight Reasons to Ignore the Bitcoin Craze
If you’ve never heard of Bitcoin, here’s a serious question: Where in the heck have you been?
The digital cryptocurrency known as Bitcoin has been a hot talking point for months, mostly because it surged in value from several hundred dollars to more than $17,000 in a matter of months in 2017.
Imagine if you purchased five Bitcoin last December when each theoretical “coin” was worth around $766. If you held your $3,830 investment until Bitcoin surged over $16,000 early this December, you’d have turned your investment into $80,000. Not bad, huh?
But what if, like most people, you didn’t buy Bitcoin? At this point, you might have a serious case of FOMO – or “fear of missing out.” Whether or not you had the cash to invest in Bitcoin when you first heard about it, you might have a serious case of regret.
While it’s easy to understand why you might feel like you missed out on something big, here’s the good news: A lot – and I mean a lot – of financial advisors and economists are suggesting we all ignore the entire Bitcoin craze altogether.
And these people are actual financial advisors and economic experts trained in the financial markets and how they work, not your neighbor Doug who invested $500 in Bitcoin and now thinks he’s a genius.
Eight Reasons You Should Ignore Bitcoin Mania
When experts who know a thing or two about financial markets and the economy talk about Bitcoin, we should listen. Here are eight reasons some experts say we should ignore the hype around Bitcoin and other cryptocurrencies – at least for the time being.
#1: Bitcoin is an obvious bubble.
A financial bubble, according to Investopedia, is “an economic cycle characterized by rapid escalation of asset prices followed by a contraction.” Remember that what goes up quickly very often comes crashing right back down, and that could very well include Bitcoin.
Some experts even call Bitcoin an obvious bubble. Recently, Nobel Prize-winning economist Paul Krugman shared his thoughts on Bitcoin with Business Insider. To say that Krugman thinks Bitcoin is a bubble could be the understatement of the year. In fact, Krugman says the Bitcoin bubble is “even more obvious than the housing bubble was.”
But if it’s a bubble, when will it crash? Like everyone else, Krugman doesn’t know. Since Bitcoin isn’t anchored by real estate, stocks, or anything of tangible value, Krugman says we’re waiting for a “Wylie Coyote moment.” At some point, Bitcoin will run off a cliff and look down. Only then will we all realize there’s nothing underneath.
Indiana Financial Advisor Tom Diem says Bitcoin reminds him a lot of Tulip Mania, a historic bubble that took place in the 1600s when tulips were brought to Holland from Turkey and introduced to the Dutch. The local population became so enthralled with the new flower that they started trading the bulbs like mad.
Where tulip bulbs had once cost as much as an onion, they surged to reach the price of an estate. Of course, the whole thing eventually came crashing down, and tulip bulbs were suddenly worth what you might expect to pay for a flower – not a lot.
#2: Bitcoin is mostly driven by FOMO.
While Bitcoin has some advantages as a currency — low fees, easy transfers, anonymity — many investors don’t really know much about it. Krugman says this lack of knowledge is a good thing for now as the price continues to surge. But eventually, we may all find that FOMO is the root cause of the currency’s sudden rise in value.
This is a problem, says financial advisor Anthony Montenegro of The Blackmont Group. Many investors driving the price up are doing so because they’re more scared of missing out on returns than they are of actually losing money, he says.
“They’ve succumbed to the fear of missing out,” he says, adding that you shouldn’t “believe the hype.”
As a financial advisor, Montenegro believes and has always believed that steady plodding brings prosperity and hasty speculation brings poverty. “Plan wisely and invest accordingly,” he says.
And perhaps remember the wise words of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.”
#3: Bitcoin isn’t backed by a country.
Financial advisor Michael Solari says one of his biggest worries is the fact that Bitcoin, like other cryptocurrencies, is not tied to a country. Without a national bank backing the currency, what will happen if the market tanks or something goes extremely awry?
Former hedge fund manager Todd Tresidder, who blogs at FinancialMentor.com, also says that, while part of Bitcoin’s appeal is that it operates outside of government control, this is simultaneously disconcerting, because government needs to control currencies if they hope to implement policy.
Tresidder says there’s a real risk the federal government could choose to regulate and control cryptocurrency. “And, it’s not a big stretch to imagine them making all currency not originated from government illegal,” he says. “That would, of course, have a dramatic impact on price through its impact on supply and demand.”
#4: It makes more sense to invest in what you know and understand.
Financial advisor Stephen Rischall of 1080 Financial Group says one of the main reasons he isn’t suggesting his clients invest in Bitcoin is because they, like everyone else, do not understand it.
“If you don’t understand how it works, what it does, and how you can easily get your money back, then you probably should think twice before investing in it,” Rischall says.
Cryptocurrencies are highly speculative and unregulated, notes Rischall. “It’s the wild west of investing, where numerous cases of fraud and hacking thefts are hidden by greed and hyper marketing.”
#5: Bitcoin is extremely volatile.
While Bitcoin prices have surged steadily over the past year, the daily value of this currency has been all over the place. These huge swings can cause off-the-charts emotional reactions that will only be amplified the larger the movement, says financial advisor Brett Romero of SAS Capital Investment Advisory Group.
Imagine if you dove into Bitcoin when its value was at $16,000, then watched as its value plunged beneath $14,000 just a few days later — as it did early on December 22. You’d likely be extremely stressed out, and maybe even sell your investment to thwart off further losses.
Either way, volatility can easily cause us to lose our cool and make rash investment decisions.
#6: Investing in Bitcoin promotes gambling behavior.
Financial advisor and investment analyst Joseph Hogue of My Stock Market Basics says Bitcoin isn’t nearly as big of a problem as the investing behavior it creates. Making a lot of money on a short-term investment always turns into gambling, he says. And when you get accustomed to gambling, it’s hard to invest any other way.
“You’re going to be constantly looking for the next hot stock,” he says. “You might make money on a few but you’ll end up chasing your losers all the way down, throwing more money into them until you’ve given up your profits and then some.”
And let’s not forget that you’ll likely lose thousands to taxes and trading fees along the way. “True investing won’t make you rich overnight, but it will meet your goals if you stick to a long-term strategy,” says Hogue.
#7: Bitcoin is highly concentrated in the hands of a few.
As of earlier this year, just 1,000 people owned 40% of the Bitcoin currency, according to Bloomberg. You can see why this could be problematic. Imagine some of those investors, often called “whales,” decided to capitalize on their gains and sell their Bitcoin all at once. What would happen to the currency?
As the market floods, chances are good Bitcoin prices would drop with a thud, says financial advisor Christopher Clepp. Having so much Bitcoin in the hands of so few makes it “ripe for market manipulation by a relatively small number of people,” he says.
And if these owners decided to coordinate their movements to protect themselves from losses, they could. Since Bitcoin is a currency and not a security (a stock), there’s “no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes,” notes Bloomberg.
#8: Bitcoin may be especially susceptible to hacking and theft.
Because Bitcoin is a digital currency that is mostly unregulated, it may be especially susceptible to hacking. And this is already playing out. In early December of this year, for example, more than $60 million in Bitcoin was stolen through a trading site called NiceHash.com, notes CNBC. And apparently, North Korean hackers had stolen upwards of $80 million in Bitcoin as of a few weeks ago.
But Clepp says this may just be the beginning. “The coming wave of quantum computing, which will accelerate greatly in the next two to four years, will render much of the cryptography of bitcoin near useless in preventing hacking and theft,” says Clepp.
In other words, it could all get worse before it gets better. And it may never get better.
The Bottom Line
Instead of racking your brain over how or when to invest in Bitcoin, most financial advisors suggest you focus on real, tangible financial goals. Boosting the amount you’re saving for retirement by a few percentage points, building up your emergency fund, and paying down debt can make a huge difference in your net worth over time, for example.
These tried and true financial moves may not be as exciting as Bitcoin, but they will pay off in the long run.
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- 10 Things You Need to Do Before You Start Investing
- Why Employer Stock Is One of the Riskiest Investments You Can Own
Did you invest in Bitcoin? Are you planning on it? Please share in the comments below.