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Reddit Trading Is Leading to ‘Massive Market Manipulation,' Top Investor Warns. How to Protect Your Portfolio

Tiffany Hagler-Geard | Bloomberg | Getty Images

The Reddit-fueled trading frenzy is getting out of hand, according to the country's top investment advisor.

Ric Edelman, the No. 1 registered investment advisor in the United States and founder of Edelman Financial Engines, said Monday that he's "very concerned" about what he sees as a sweeping "pump-and-dump scheme" roiling markets.

"This party's going to come to an end," Edelman said Monday on CNBC's "ETF Edge." "There do need to be fundamentals. There need to be a sound basis economically for the pricing to be what it is."

As "the democratization and the demonetization of Wall Street" progresses, buying stocks based on fundamental characteristics such as cash flow, management and return on investment is taking a backseat, Edelman said.

Instead, influencers such as Elon Musk and Mark Cuban are front and center, tweeting about investments that can skyrocket and lead retail investors to buy at the highs, he said.

"I think that we're seeing massive market manipulation," Edelman said. "A lot of folks don't know what they're doing and this is going to end very badly and a lot of folks are going to get really hurt."

In the cryptocurrency realm, part of the solution is education, Edelman said. He plans to leave his post at his namesake firm later this year to develop other projects including the RIA Digital Assets Council, an organization he founded to teach financial advisors about cryptocurrencies and the blockchain.

"By educating people to understand how this works, both the technology and the investment opportunities, that's how we'll enable people to protect themselves against the idiocy that we see pervasive in the marketplace right now," he said.

Though regulation is likely far off, the market could eventually correct itself, Van Eck Associates CEO Jan van Eck said in the same "ETF Edge" interview.

"I think that in the long term, the market will cure this problem," said van Eck, whose firm launched the VanEck Vectors Social Sentiment ETF (BUZZ) in March to capitalize on the rise of momentum trading.

BUZZ is up more than 12% since its debut. Its top holdings are Virgin Galactic, Nvidia, Palantir, Tesla and Apple.

"All new technologies, from the railroad through the cars and everything, attracted a ton of speculative capital and the prices went up too high, but it attracted business activity towards a space that had a lot of technological promise and ultimately a huge impact, a positive impact, on society," van Eck said.

Even if today's speculative investments follow the same path, it won't necessarily benefit individual investors, Edelman said.

"That's great for the economy. It's great for society and humankind. That's not necessarily great for the individual investor who bought high and sold low," Edelman said. "So, you need to protect yourself within this opportunity, within this ecosystem, so that you are personally benefiting and not merely contributing to the benefit of society."

Representatives for Musk and Cuban did not immediately respond to a request for comment.

Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank," which features Mark Cuban as a panelist.


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