HAMISH MCRAE: There is method to the Bitcoin madness

It’s crazy for Bitcoin to break through the $100,000 barrier, as it briefly did on Thursday. But as Polonius observes in Hamlet: “Though this be madness, there is method in it.”

Madness is easy to trace. This is an asset that is inherently useless. It’s just a line of computer code that generates no revenue and is not backed by anything.

It is difficult to identify any real investment that results from this: no houses are built, no companies are launched, no medicines are discovered. But it has extrinsic value in the sense that people are willing to buy it, trade it, and keep it.

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

So it’s everywhere. You can debate why people should want to celebrate it, but you get nowhere. Why should an anonymous buyer pay $142 million for a 1955 Mercedes-Benz 300 SLR Coupe, like someone did two years ago? This is the highest price ever paid for a classic car. Or $6.2 million for a banana taped to a wall at an auction in New York last month?

Bitcoin is like any other asset. It is worth what a buyer will pay for it at any given time. It’s as simple as that.

The “method” (what this rise in Bitcoin price tells us about global markets) is more complicated. The recent surge has been fueled by hopes that the Trump administration will lead to a friendly regulatory system for cryptocurrencies, as the price has soared nearly 50 percent since the election.

This is likely to expand the range of headlines. But behind the increase is the solid performance of financial assets in general.

To name just a few, US stocks are close to all-time highs, 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 in the year and are reaching a new record. .

There are laggards, of course, and the poor old FTSE100 index is one of them. But this year it’s up 8 percent, so even less-loved investment sectors have been squeezed out by their trendier cousins.

There are many reasons why asset prices should be so high. We had a decade in which central banks printed industrial quantities of money under their quantitative easing programs. That had to go somewhere.

With generative artificial intelligence, we have a technological revolution that seems to bring enormous improvements to the efficiency of service industries and the quality of their production.

Even more expansionary economic policies are likely in the United States and there is the possibility of further interest rate cuts next year if inflation continues to fall. Global policymakers, especially in the United States, have created a financial boom.

However, there is a fine line between a boom and a bubble. So where are we now? It’s hard to feel comfortable with what has happened to the price of bitcoin.

If the most speculative assets skyrocket, that screams bubble.

And even the staunchest defenders of cryptocurrencies would have to acknowledge that they are on the speculative scale.

US stocks are at the high end of their historical values. But they are not yet at extreme levels, indicating a boom rather than a bubble. We also know that booms generally last much longer than people expect and then end more suddenly.

My guess is that there will be some major event that indicates the asset bull market has overextended itself. We haven’t had it yet. Bitcoin surpassing $100,000 is a warning that markets have become frothy, but cryptocurrencies are not important enough to rock the global ship.

We could have a crypto crisis without a broader collapse of major assets, particularly stocks.

In fact, there may not be a sudden collapse in global stock prices, but just a gradual top and fall before an eventual recovery.

We cannot realistically follow Polonius’s advice: “Neither be a borrower nor be a borrower.”

But the rise of Bitcoin sends the message that it is time for caution.