Color of Money: Bitcoin investing is sexy. But is the risk worth the thrill?
WASHINGTON -- Even as the stock market continues to soar, investors are looking for the next great thing that will transform them into the millionaire next door.
Many believe bitcoin is that thing. They like the thrill of a new payment system taking hold. So, despite cautions from regulators and investment advisers, people are rushing in hoping to make a fortune. And therein lies my problem with bitcoin and its virtual cousins: Quick money often leads to disappointment.
Already this year, bitcoin has seen heart-stopping drops, prompting more consumer warnings from regulators. The Commodity Futures Trading Commission -- which has oversight of such virtual currencies as bitcoin, ethereum and litecoin -- has created an online resource at cftc.gov/bitcoin for those who dare to invest. Be sure to read: "Understand the Risks of Virtual Currency Trading."
Also, the American Enterprise Institute is hosting a panel discussion on bitcoin from 5 p.m. to 6:30 p.m. Feb. 12. You can watch it live online at aei.org. The main question the panelists will address is: Are bitcoin and its competitors sustainable currencies, or is this just another investing fad that will eventually crash spectacularly?
Bert Ely, principal of Ely & Company Inc., a consulting firm in Alexandria, Virginia, will be on the panel. Ely is a prolific pontificator on financial issues, and his latest mission is to caution investors about chasing bitcoin returns. I've been reaching out to financial experts to ask them what people are asking me about investing in bitcoin, and here are Ely's answers.
Q: Why is bitcoin bad for the average investor?
Ely: Bitcoin, and all other cryptocurrencies, except possibly some of the Initial Coin Offerings (ICOs), are not real investments comparable to a home, real estate, stocks, bonds, mutual funds, or other assets that produce income or are tangible assets that can experience genuine price appreciation.
In a sense, cryptocurrencies are a mirage, a game of sorts, that will end badly for most investors, especially if they have borrowed money to gamble on cryptocurrency price appreciation.
Q: Why shouldn't some people, with money they can afford to lose, chase bitcoin returns?
Ely: People who like to gamble with money they can afford to lose should view investing in, or actively buying and selling bitcoin and other cryptocurrencies, as akin to gambling at a casino, betting on the horses at the race track, or buying lottery tickets.