I have to admit that I’m a little late to the current Bitcoin craze. I first heard of Bitcoin several years ago when it was first created. Back then it was famous for being an online currency that was used for mostly illegal activities. Since then I had not kept up with the meteoric rise in price.
Starting last year I started seeing more and more articles about how Bitcoin was rising in value. Then I would hear random people talk about how they were “investing” in the cryptocurrency. Now it seems that not a day goes by where I don’t see Bitcoin on the news or hear about it in conversations.
Just in 2017 alone, the price of Bitcoin has climbed more than four times! This is a parabolic increase which should raise some red flags. Whenever the price of something increases so fast by so much it should be cause for alarm based on history. Jamie Dimon, the CEO of JP Morgan, and one of the most respected CEOs in the country agrees. In his interview with Bloomberg this week he outlined why Bitcoin is not a safe investment.
Bitcoin was first created in 2008 by Satoshi Nakamoto. They are “mined” using fast computers utilizing Blockchain technology. The problem is that Bitcoin does not hold any real value. Nobody knows for sure how many Bitcoins are in existence. One of the first things that Governments do when they are formed is to institute a money system. These governments around the world will not want to have competition with their money supply. Dimon said about Bitcoin, “It’s just not a real thing, eventually it will be closed.” There is nothing stopping any government from banning Bitcoins in their country. In fact, China recently announced that they are shutting down Bitcoin exchanges.
2) Price Uncertainty
Dimon said “I’m not saying go short bitcoin and sell $100,000 of bitcoin before it goes down.” Jamie cannot predict the future and doesn’t know when the price will drop but he is pretty certain that eventually it will plummet. Typically things fall extremely fast in a nearly straight line after a parabolic rise. It may continue to go up in value for a while, but you don’t want to be left holding the bag when it crashes.
3) Potential Bubble
We are constantly reminded that the stock market may be in a bubble. However, stocks represent the earnings power of real companies. Also, stocks have not risen four-fold in less than a year. Like I mentioned before, anytime that there is a parabolic rise in value of something you should be concerned. People who don’t know anything about Bitcoin are piling into it in order to catch the wave. Dimon was quoted as saying, “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Read up on the Tulip Mania for a cautionary historical perspective. The current Bitcoin craze is also not unlike the early 2000’s Tech Bubble. During that time everybody was investing in stocks and there were a lot of paper millionaires. Many people ended up losing not only their earnings but also their original contributions.
4) Professional Behavior
The big investment banks are not speculating in Bitcoin. When asked if someone traded at JP Morgan he said, “If a JP Morgan trader began trading in bitcoin I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” If the professionals who study investing for their jobs are avoiding Bitcoin, then individual investors should as well. It is highly unlikely that the Bitcoin speculators are more adept than Wall Street professionals. This is another sign to steer clear of cryptocurrency speculating.
Readers, are you speculating in Bitcoin? What do you think of Jamie Dimon’s words of caution?