HAMISH MCRAE: There’s technique within the Bitcoin insanity

It is madness that bitcoin should break through the $100,000 barrier, as it did briefly on Thursday. But as Polonius observes in Hamlet: ‘Though this be madness, yet there is method in’t.’

The madness is easy to chart. This is an asset that is intrinsically worthless. It’s just a line of computer code that generates no income and is backed by nothing.

It is hard to identify any real investment that results from it: no houses are built, no companies launched, no medicines discovered. But it has extrinsic value in that people are prepared to buy, trade, and hold it.

A year ago they put the value at $44,000. Two years ago it was $17,000. Go back another year to 2021 and it was $50,000. Five years ago it was $7,500.

So it’s all over the place. You can have a debate about why people should want to hold it, but it gets nowhere. Why should an anonymous buyer pay $142 million for a 1955 Mercedes-Benz 300 SLR Coupe, as someone did two years ago? That was the highest price ever paid for a classic car. Or $6.2 million for a banana duct-taped to a wall at an auction in New York last month?

Bitcoin is like every other asset. It is worth what a purchaser will pay for it at a particular moment of time. It’s as simple as that.

The ‘method’ – what this surge in the price of Bitcoin tells us about global markets – is more complicated. The recent surge has been fuelled by hopes that the Trump administration will lead to a friendly regulatory system for crypto-currencies, for the price has shot up by nearly 50 per cent since the election.

This is likely to broaden the range of holders. But behind the surge is strong performance of financial assets more generally.

To pick just a few, US equities are close to all-time peaks, the German DAX index is there too, and here in the UK the Halifax house price index shows prices are up 4.9 per cent on the year and are reaching a new record.

There are laggards, of course, and the poor old FTSE100 index is one of them. But it is up 8 per cent this year, so even unloved investment sectors have been pulled up by their more fashionable cousins.

There are lots of reasons why asset prices should be so strong. We had a decade of central banks printing industrial quantities of money under their quantitative easing programmes. That had to go somewhere.

With generative artificial intelligence, we have a technological revolution that looks like bringing huge improvements to the efficiency of service industries and the quality of their output.

There are likely to be even more expansionary economic policies in the US, and there is the prospect of further cuts in interest rates next year if inflation keeps falling. The global policy-makers, notably in the US, have created a financial boom.

There is, however, a fine line between a boom and a bubble. So where are we now? It is hard to feel comfortable about what has happened to the price of bitcoin.

If the most speculative assets are soaring, that shouts bubble.

And even the most doughty supporters of cryptocurrencies would have to acknowledge they are towards the speculative scale.

US equities are towards the top end of their historical values. But they are not yet at extreme levels, so that says boom rather than bubble. We know, too, that booms generally carry on much longer than people expect, then end more suddenly.

My guess is there will be some big event that will signal the bull market for assets has gone over the top. We haven’t had that yet. Bitcoin topping $100,000 is a warning that markets have become frothy, but cryptocurrencies are not important enough to rock the global boat.

We could have a crypto-crash without a wider collapse in mainstream assets, notably equities.

Indeed there may be no sudden collapse in global share prices – just a topping out and gradual drift downwards before eventual recovery.

We cannot realistically follow Polonius’s advice: ‘Neither a borrower nor a lender be.’

But the Bitcoin boom does carries a message that this is a time for caution.