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 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 investing in Bitcoin or any other cryptocurrency. Don’t worry, though; the real value lies in blockchain technology, enabling cryptocurrency, and many other important innovations. If you own an index fund, you already own numerous companies working with blockchain, including IBM and Hitachi.
- Economic Value: There should be an underlying rationale for how it generates economic value for any investment. 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.
