Investment guru Jim Cramer warns savvy investors not to buy into the volatile hype of the digital currency bitcoin and it’s rocket ride and subsequent dips.
"Even if you believe in bitcoin, the velocity of the move is a sign that it is parabolic. And parabolic moves don't last," Cramer said on CNBC.
"And I know that when I look at that, I say to myself, 'OK, if I owned it, what would I really be doing?'" Cramer added. "And the answer is when you have that big of gain you have to take some profits. That velocity is crazy."
To be sure, hours after surging past $11,000, bitcoin tumbled almost 20 percent from the high, wiping more than $2,000 from its price in five hours. It traded at $9,340 as of 2:52 p.m. in New York.
The heaviest selling came amid reports of service outages and delays on some of the largest online exchanges, Bloomberg reported.
The cryptocurrency had rallied 20 percent in just four days, topping $10,000 for the first time earlier this week in a runup that drew increased warnings it was in a bubble. Bitcoin ended September at $4,171.25.
Bitcoin’s rapid ascent has led to countless warnings that it has reached bubble territory. But the warnings have had little effect, with dozens of new crypto-hedge funds entering the market and retail investors piling in.
London-based Blockchain.info, one of the biggest global bitcoin wallet-providers, told Reuters on Wednesday that it had added a record number of new users on Tuesday, with more than 100,000 customers signing up, taking the total number to more than 19 million.
The evidence suggests that few of the users are buying bitcoin to use it as a means of exchange, but are speculating to increase their capital.
“What’s happening right now has nothing to do with bitcoin’s functionality as a currency – this is pure mania that’s taken hold,” said Garrick Hileman, a research fellow at the University of Cambridge’s Judge Business School.
“This is very much a bubble that will very much correct itself at some point and people need to be very careful.”
Hileman, who last week gave a lecture to the Bank of England on the risks of bitcoin and other cryptocurrencies, also flagged the risk of the whole market collapsing entirely.
“There’s always the possibility that some fundamental cryptographic flaw that we can’t solve craters the whole space, or that regulators unite and decide this represents systemic risk and actually could trigger the next financial crisis,” he said.
Created in 2008, bitcoin uses encryption and a blockchain database that enables the fast and anonymous transfer of funds outside of a conventional centralised payment system.
It has far outstripped gains seen in any traditional asset classes or currencies this year. It rise accelerated in recent months as exchanges such as the CME Group Inc and the Chicago Board Options Exchange announced plans to offer futures contracts for the cryptocurrency.
Sceptics say it a classic speculative bubble with no relation to real financial market activity or the economy - most famously JPMorgan boss Jamie Dimon, who labelled it a “fraud”.
But even Dimon and others who say bitcoin represents a bubble - now the consensus view among mainstream investors - do not deny its price rise could still have further to go.
(Newsmax wire services contributed to this report).
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