Entrepreneurs

Kevin O'Leary: This common behavior among bitcoin investors is a 'cocktail for disaster'

Kevin O'Leary, an investor on the television show 'Shark Tank' is seen on the floor of the New York Stock Exchange on the afternoon of March 4, 2014 in New York City.
Andrew Burton | Getty Images
Kevin O'Leary, an investor on the television show 'Shark Tank' is seen on the floor of the New York Stock Exchange on the afternoon of March 4, 2014 in New York City.

Cryptocurrencies have caught the attention of financial analysts, CEOs and regular people hoping to get rich quick after dramatic spikes in recent weeks created millionaires and possibly billionaires out of early believers.

The price of a bitcoin increased by about 1,600 percent from the close of Dec. 31, 2016 to the close of Dec. 14, 2017. Friday morning, bitcoin was trading over $17,500, according to industry site CoinDesk. In a spike, bitcoin briefly topped a record $19,000 in December trading on the Coinbase exchange. Other cryptocurrencies like litecoin and ethereum have seen gains too.

But before you use your hard-earned dollars to get a piece of the action, Kevin O'Leary has a word of warning about the mania.

"I'm quite sure that 99 percent of the people that own bitcoin do not understand how it works," he tells CNBC Make It. "That always is a cocktail for disaster."

The technology behind bitcoin is complex: Its creator remains unknown, but the original white paper outlining the idea for bitcoin describes it as a "peer-to-peer version of electronic cash," operating on a decentralized digital ledger, known as blockchain.

If the promise of big gains has enticed people to buy bitcoin without researching the idea fully, that spells trouble. "I've seen this movie before, it ends badly," O'Leary says.

"You should never invest in something you don't understand," he says.

One thing people don't understand, is that bitcoin doesn't actually work as a currency, according to O'Leary.

He recently tried to do a roughly $200,000 deal in bitcoin, but because its value is so volatile, the other party would only agree if he guaranteed the value of the bitcoin against the price of the U.S. dollar.

"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.

Think of it like this: When you use dollars to buy a cup of coffee, for example, 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, like art.

So, "If you don't have a real understanding of what you are doing with that, you should only treat [bitcoin] for what it is — great entertainment," he says.

That means only buying bitcoin with money you're willing to lose, and treating the decision like you would gambling in a casino. (Investment experts Jim Cramer and Tony Robbins both agree with O'Leary that buying bitcoin is like going to Vegas.)

"I don't know if it is going to $40,000 or zero, and nobody knows. So, I just think it is a wonderful entertainment, just like a slot machine is, or putting chips on a roulette wheel," says O'Leary.

"Right now it is fun, exciting, entertaining. As long as you can afford to lose everything you put into it, go with it."

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

Like this story? Like CNBC Make It on Facebook!