The surge in bitcoin prices is causing a buzz that likely won’t end well for many. But what’s happening serves as a useful and cautionary lesson for long-term investors.
In short, fun and investing don’t mix well.
Rose Swanger, a certified financial planner at Advise Finance in Knoxville, Tennessee, says she was approached by an investor inquiring about cryptocurrency. “He called to say his friend had just made $2,000 in just one week by trading bitcoin,” she says. “He wanted to see if he should do the same.”
The problem is that the bitcoin craze, which has seen prices jump from less than $1,000 a year ago to more than $16,000 recently, is reminiscent of the dot-com fad that quickly morphed into a bubble — and then popped.
[See: Avoid These 8 Rookie Investing Mistakes.]
“I started invested in the late 1990s because at that time you could throw money in the market and just make money, but it ended when the tech bubble burst,” Swanger says. The Nasdaq 100 index, which was heavy on tech stocks, fell from more than 4,000 in March 2000 to less than 900 in September 2002, according to data from the St. Louis Federal Reserve.
Now Swanger advises her clients to be more cautious. She told the man who called her to “put just 1 percent” of his portfolio into bitcoin, reasoning that he was already determined to invest so she could persuade him to only take a small stake.
Whether he took Swanger’s advice is another matter because ads and news reports have investors dreaming of a big, quick payday. CBOE Global Markets’ bitcoin futures contracts also started trading recently, giving investors another avenue to bet on bitcoin.
Even pros get it wrong. It isn’t just neophytes who get caught up in frenzies. Rebecca Kennedy, founder and principal of Kennedy Financial Planning in Denver, remembers younger portfolio managers putting up to 60 percent of client money into tech stocks during the late 1990s tech stock craze, even though the valuations climbed each day.
“The more seasoned managers, however, were much more cautious about jumping on the tech stock bandwagon,” Kennedy says. Eventually, the “seasoned managers were finally vindicated for their more judicious approach and the young managers got fired.”
[Read: How to Invest in Bitcoin and Digital Currency.]
Unfortunately, there is little new under the sun when it comes to human emotions, and cryptocurrencies look to be replicating the dot-com surge.
Paul Donovan, global chief economist for UBS Wealth Management, calls bitcoin “the bubble to end all bubbles.” And Michael Novogratz, former Fortress Investment Group hedge fund manager, has called cryptocurrency “the biggest bubble of our lifetimes by a longshot.”
What’s wrong? It’s easy for investors to get carried away with dreaming of big bitcoin gains when they have 24/7 instant access to market prices and a constant feed of investment news and commentary.
“The technology has turned Wall street into a live casino where we were gambling,” says Lance Roberts, chief investment strategist at Clarity Financial in Houston. “We no longer analyze data.”
It used to be that the market was a way to invest savings so that the money could grow over long periods of time, withstanding the withering effect of inflation. It’s a tried-and-true formula for long-term wealth.
“I’ve been around markets since 1987, and there’s a huge difference [from before],” Roberts says. “People have been sucked into the market like it is a game at a casino.”
Patience is needed. Waiting long periods of time for your investment returns requires a lot of patience. It’s nearly every scenario, it’s not for getting rich quick.
Roberts says two quotes come to mind for investors who are tempted to make investments to any asset, whether it be bitcoin, stocks or bonds.
The first comes from a legendary economist, Paul Samuelson, the first American to win the Nobel prize for economics. “Investing should be more like watching paint dry or watching grass grow,” he says. “If you want excitement, take $800 and go to Las Vegas.”
[Read: How to Unlock Blockchain’s Investment Potential.]
The second from famed investor George Soros, who famously broke the Bank of England by selling short the British pound. “If investing is entertaining, if you’re having fun, you’re probably not making any money,” Sorors says. “Good investing is boring.”
So if you are having fun with bitcoin, just stop. Perhaps you should watch some grass grow instead.
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Trading Bitcoin Is a Bad Way to Invest originally appeared on usnews.com
