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Investment

Cramer's 5 reasons for being suspicious of bitcoin

With the CBOE, CME and Nasdaq hopping aboard the bitcoin train to offer their own derivatives of the wildly popular cryptocurrency, CNBC’s Jim Cramer issued a warning about the craze.

“After its recent ascent, bitcoin’s become some sort of abstruse casino game that seems to have only winners and no losers. You’ve got to like that, right? I think, though, that could change,” the “Mad Money” host said. “Whenever any security runs from $5,000 to $10,000 to $15,000 to $19,000 in a matter of weeks or even hours, you’ve gotta wonder how long it will be before it bursts.”

Given the buzz around bitcoin, Cramer said that it could still have room to run even after Thursday’s rally, which brought the digital currency above $19,000 for the first time.

But the “Mad Money” host still came up with five reasons to be suspicious of the trend.

“First, no one knows who created it. Second, no one knows how much the creator reserved for themselves. For all we know, there are tons of these things sitting on the sidelines somewhere. Third, there’s virtually no transparency into the underlying system,” Cramer said. “Fourth, there’s no government backing — obviously — there are no underlying assets backing it up and there’s no military support for the bitcoin system, unlike real currencies.”

Fifth, despite the professed protection of blockchain, the secure way to trade bitcoin, Cramer pointed out the bitcoin is software. And software, as we know all too well, can be hacked.

“When, not if, but when, that happens, it will be a total loss as there’s no insurance and no fiat backing,” Cramer said. “With those five considerations, sooner or later, this thing’s going to run out of steam.”

Cramer said that the real driver behind the rally could be hidden buyers hoarding bitcoin because they want to keep the supply tight.

That’s part of the reason why bitcoin is often cast as the “death knell” to gold, which remains a precious metal because only 1 percent of the world’s supply is mined each year, Cramer said.

But the three major exchanges creating bitcoin futures will make the digital currency a two-way market, putting people on the other side of the trade. Not only would that help eliminate hoarding, but it’ll introduce shorting possibilities, the “Mad Money” host predicted.

“Once we get an orderly market in bitcoin, I think a top won’t be far behind,” he said. “Look, I want to congratulate everyone who was early on this story, everyone who … sold it at $19,000, everyone who’s made a fortune in bitcoin. You’re smart, you’re good, you’re fabulous. But when the other side of the trade develops, bulls make money, bears make money, and pigs get slaughtered. And I do not want you to be a pig and get slaughtered.”

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Cramer's 5 reasons for being suspicious of bitcoin

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