Entrepreneurs

Kevin O'Leary explains one big thing people don't understand about bitcoin (but need to)

Kevin O'Leary
Scott Mlyn | CNBC
Kevin O'Leary

With the recent frenzy around the staggering rise in the price of bitcoin, which briefly reached a high of $19,340 trading on the Coinbase exchange on Thursday, "Shark Tank" star and investor Kevin O'Leary wants to make one thing about the cryptocurrency crystal clear.

It isn't a currency. It's just too volatile for that.

"I don't consider it a currency and I'll tell you why," O'Leary tells CNBC Make It. He recalls an experience that taught him firsthand the problem with bitcoin's volatility.

"I recently tried to settle a transaction for around $200,000 with bitcoin. It was an international transaction with a European entity and I suggested, 'Why don't we try bitcoin?'" O'Leary explains.

The benefit of using bitcoin would be to eliminate the hassle of exchanging currencies and clearing the money through banks. "The whole idea of bitcoin as a currency is you don't have to do any of that," O'Leary says. "You just buy $200,000 of bitcoin and then send it to them."

Then he hit a snag. The Europeans he'd be paying wanted O'Leary to guarantee the value of the bitcoin against the price of the U.S. dollar.

"In other words, I have to insure [the bitcoin] because it is, as you know, very volatile," O'Leary says.

The Europeans certainly had a reason to be concerned, bitcoin has seen wild swings in recent days. After it hit over $19,000 trading on the Coinbase exchange, it then fell more than 20 percent to just above $15,000. Tuesday, the price had just topped $12,000.

The problem? Imagine O'Leary paid his European counterparts the equivalent of $200,000 on Thursday when the price of bitcoin was trading at $19,000 — that would be roughly 10.53 bitcoin. Later that very day, the same 10.53 bitcoin were worth just over $160,000.

O'Leary decided he didn't want to take on the risk of the value drastically changing either.

The experience taught him bitcoin doesn't work as a currency.

"If clearly neither side thinks it is stable enough to transfer in one minute, and they don't even want to take one minute of risk, it is not a currency," he says.

To think about it another way, consider U.S. dollars. When you use dollars to buy a cup of coffee, you and the coffee shop both expect the value of the dollar to remain stable between the time you order and the time you pay. Each side agrees, $2.50 equals one cup of coffee. O'Leary says bitcoin lacks that quality.

"The fact is, it is so unstable — volatility is both directions, it's up and it's down — that nobody in a substantive transaction will take that risk," O'Leary says. "So it is a long way from being a currency.

"However, is it an asset? Yes. It is one of the most successful assets on the planet right now because it's a global speculation."

Unlike a currency, which is used to assign and exchange value, an asset has its own inherent value based on what people will pay for it.

O'Leary's fellow "Shark Tank" star Mark Cuban explains the value of bitcoin this way to Vanity Fair: "It is like collecting art, like collecting baseball cards ... something is worth what somebody else will pay for it."

But just as with a painting, the value is hard to pinpoint.

While the price continues to surge, O'Leary suggests caution when regarding what bitcoin is really worth.

"I have no idea what its value is, and neither does anybody else," he says. "The volatility makes it very difficult for me as an investor to put that into a portfolio. So to me, it is a speculation."

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This story was updated to correct an error in calculation.

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