Want to bet on bitcoin? Be prepared to lose all
Bitcoin just made the Winklevoss twins paper billionaires. Might it do the same for you? Last Thursday, the explosively appreciating cryptocurrency briefly rose past $19,000 -- from below $1,000 at the start of the year.
On Friday, bitcoin traded around $16,000, according to Coinmarketcap.com.
With bitcoin's price chart looking a lot more like a rocket trajectory than a sensible, steady investment that might merely plateau, investment advisers and financial planners say they're getting inundated with inquires from ordinary investors.
"The gains have gotten a lot of publicity -- up 40 percent this week, with a $5,000 jump over 48 hours," said Kirsty Peev, portfolio manager for Halpern Financial in Rockville, Maryland. "But people seem to forget the fact that bitcoin regularly has dips of 20 percent or more after it jumps up like this. High risk goes with high return."
Peev added that "for the average person, the benefit of encrypted, fully anonymous financial transactions does not yet outweigh the risk to use it."
Bitcoin and other cryptocurrencies have transformed from an esoteric idea hatched on the internet to the financial world's mainstream with market valuations that eclipse some publicly traded corporations, including Goldman Sachs (GS). Cryptocurrencies' rise -- led by the most well-known currency, bitcoin -- has individual investors looking to buy, financial planners like Peev say.
"I advise my younger clients to invest 2 percent of their portfolio in digital currencies as a long-term speculative play," Jason Kirsch, founder of Grow, which tailors its advice to millennials, said in an e-mail. "For allocation reasons, I can't imagine substituting digital currency for something that humans have romanticized about for thousands of years. You know, that shiny yellowish metal called gold."
"I don't advise 'playing' bitcoin," he said. "There are better ways to gamble."
Some advisers are telling clients to stay away unless they can afford to lose 100 percent of what they put into a cryptocurrency investment.
"I categorize bitcoin as an investment the same way that I do going to a casino and playing. Could you win? Possibly, but you could also lose all of what you put in," said Miguel Gomez of Lauterbach Financial Advisors in El Paso, Texas, who also hosts a podcast for Spanish-speaking investors. "If you have money that you wouldn't regret losing, maybe it could be an interesting experiment. But I think going to a casino or spending it on a nice date/trip with your significant other can be a more valuable use of your money."
If you must invest, make sure to use a recognized exchange. Slow response times and technical problems opening accounts have surfaced because of increased interest, Gomez noted.
In fact, complaints about cryptocurrencies and related transactions are climbing at the Consumer Financial Protection Bureau, Bloomberg reported earlier this year, with gripes about everything from transaction problems to unexpected fees.
Unlike regular currencies, such as the dollar or euro, bitcoin and other cryptocurrencies aren't backed by a central bank. What intrigues some on Wall Street and, perhaps more important, in Silicon Valley, is the possibility of the so-called blockchain technology used for cryptocurrencies and their transactions, including bitcoin.
The Futures Industry Association, which represents Wall Street's biggest banks and clearinghouses, sent a letter last week to the Commodities Futures Trading Commission saying that as the guarantors of customers' trades, it should have been consulted before trading in bitcoin futures was approved. The FIA expressed concern that the extreme volatility in bitcoin could leave banks exposed when the futures move too violently.
China and South Korea have shut down initial coin offerings, known as ICOs, for cryptocurrencies, and South Korea announced Friday that it won't allow trading in bitcoin futures. Conversely, Japan earlier this year started accepting bitcoin as legal tender, helping push the currency's price higher over the summer. Japan's Financial Services Agency approved 11 companies as operators of cryptocurrency exchanges earlier this fall.
So what makes cryptocurrencies different from other investment trends that turned out to be bubbles? It sure looks like the dot-com bubble of the early 2000s or even the famous tulip bubble, referenced by JPMorgan Chase (JPM) CEO Jamie Dimon, who famously called bitcoin a "fraud" back when it was trading near a mere $5,000 in September.
"It's possible that bitcoin (or ethereum or one of the other cryptocurrencies) could retain its value. But it seems more likely that the mania will subside and a more stable electronic currency could become a global currency," said Rick Brooks, chief investment officer at Blankinship & Foster in Solana Beach, California, in an e-mail. "And there are just too many instances of hacking to make it a reliable store of value."
Bitcoin enthusiasts are expecting the launch of futures tied to the price of bitcoin to cool the market's frequent wild price swings. CBOE Global begain trade bitcoin futures over the weekend, and rival CME Group will soon enter the market. More than 100 hedge funds specializing in cryptocurrencies have launched this year, according to Axios.
"Any cent you put in, you have to tolerate two things: one is incredible volatility the likes of which you have probably never seen, and two is the possibility to lose every dime," said Eric Mancini, director of investment research at Traphagen Financial Group in Oradell, New Jersey. He says has invested in some cryptocurrency areas while researching possible vehicles for clients. "It's OK to put a small amount -- and this would be a max -- of 1 percent, or half of 1 percent for most clients, hopefully diversified among the biggest crypto-assets."
-- The Associated Press contributed to this report