Bitcoin mania reached a new low with an SEC settlement against Floyd Mayweather, Jr., and DJ Khaled for improperly promoting investments in initial coin offerings. Almost one year ago, Bitcoin mania was at its peak. The price had climbed to nearly $20,000. Each day, in addition to reporting the closing price of the Dow Jones and S&P 500, the media would report the closing Bitcoin price right along with it.
Since then, Bitcoin has lost over 75% of its value. There are several important lessons here:
- Incentives: When you read about someone hyping a stock or have someone trying to sell you an annuity, carefully assess what they might get out of it. This is true whether it’s a celebrity like DJ Khaled or your broker down the street.
- Bubbles: When the lead story each day from CNBC and other financial press becomes the price of bitcoin, things might be reaching a peak. Of course, the price of Bitcoin could have continued to increase. We just don’t know. But no single security should receive that much attention when it is really much more of a gamble than an investment.
- Diversify: We don’t recommend making an investment in Bitcoin or any other cryptocurrency. Don’t worry though; the real value lies in blockchain technology, which helps enable cryptocurrency and many other more important innovations. If you own an index fund, you already own numerous companies working with blockchain, including IBM and Hitachi.
- Economic Value: For any investment, there should be an underlying rationale for how it generates economic value. Stocks grow their earnings through innovation in products or services. Bonds pay interest. With Bitcoin, the value is primarily driven by what the next person is willing to pay you for it. It doesn’t grow or produce income. This is the same reason why we don’t believe in investing in currencies or commodities.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.