The headline for a November 21st article on Bloomberg News read “Bitcoin Mania Hits Main Street As Client Calls Bombard Advisors.” When I saw that I just smiled.
First, the experience at our firm has been quite the opposite. We have received very few calls about Bitcoin and crypto currencies. If we have more days like the one just before Christmas, in which the price of Bitcoin drops 30 percent in a day at the mere whiff of new competition, there probably won’t be many more calls. If the price continues to skyrocket, we should get more but we aren’t expecting a bombardment.
The second reason for the smile is because I know it is probably true. I have no doubt some advisors are getting lots of calls and for those that are stressed about them or scrambling to handle the inquiries, I have some sympathy. It doesn’t have to be like that.
It is not difficult to answer questions about Bitcoin. The questions about this mania are in many respects no different than other calls every advisor must field at some point about a speculative matter. I’ve noticed that these questions almost always arise from one of two types of speculations I label bubbles or insider deals.
Bitcoin is of the bubble type. The main reason people know about a bubble version of speculation is the price has gone up at a dizzying rate and it has received a lot of publicity about the price rise.
The impression is lots of people have made easy money. People wonder if they can too and they look into it a little. If they want to buy, they have usually read too many things from proponents (sellers) and determined the odds of failure very low.
They buy things they don’t really understand thinking they will make a bundle in a short period of time. Sometimes that does in fact happen. Unfortunately, even in those cases, many of them don’t sell for the quick profit. Many fear they will regret getting out too early. Others don’t want to pay the taxes on the gains or view it as house money. Next thing you know, the price no longer burdens them with a tax bill but they are anchored on the high prices that existed a short while ago and well, we all know how that scenario usually ends.
The other version of the speculation question comes from an “opportunity” with something that has received no publicity—an insider deal. So-and-so’s cousin’s brother’s friend works at XYZ and they say to buy the stock because they will be getting a new contract, unveiling a new product or will be bought out at a premium.
Of course, transacting based upon true inside information is illegal but that doesn’t stop people from being seduced by the allure of getting in on something special. The special deal dynamic can be especially problematic because this is also the domain of fraudsters. Often, the “inside” information is just unsubstantiated rumor as in a pump and dump scheme.
Other times the offer is a private business or real estate venture. Unregistered, hush hush, and topped off with a “Need to get in now!” cherry, this sundae usually makes people sick.