Anyone who makes markets predictions is setting themselves up to look silly, but when on Saturday the price of bitcoin went through $30,000 (£21,605) – well, that just seemed clear bubble territory.
Of course bitcoin can go higher. Reuters reported that Sergey Nazarov, cofounder of Chainlink, a global blockchain project, thinks it will eventually reach $100,000 (£72,063) but at some stage all markets go into reverse, and in this case there is no central bank standing by to rescue it.
Now it is true that some would say this is a plus. Mr Nazarov argues: “People have been steadily losing faith in their government currencies for years, and the monetary policies resulting from the economic impact of the coronavirus have only accelerated this decline.”
In a sense he is right, for the huge amounts of global money that have been created by the central banks have indeed undermined confidence in them. But actually it is that excess money that has piled into fringe assets such as bitcoin, other cryptocurrencies and high-tech US stocks. Ethereum, the second biggest cryptocurrency, was up 465 per cent last year, and rose a further 7 per cent on Saturday.
If that sounds extraordinary, how about a new word that has entered the language: “Teslanaires”? Those are the people who were early buyers of shares in Tesla and have become millionaires as a result. Shares were trading at $89 (£63.64) on 3 January 2020, and closed at $706 (£505) on 31 December. That is an increase of more than 700 per cent. Bully for them, you might say, and it is certainly true that Elon Musk has transformed the global motor industry. But is a company that is making 500,000 cars a year really worth more than the next nine motor companies combined?
The professional investors are mixed in their judgement. For example, Goldman Sachs thinks they might rise a bit, whereas J P Morgan expects the price to crash to $90 (£64.35). I would side with J P Morgan, but in a way this is not really about bitcoin or Tesla. They are just examples of the phenomenon. It is about the interaction between the extraordinary efforts that the central banks have made to pump up the world’s economies after the Covid crisis, and human nature’s tendency to swing from euphoria to despair – and back again.
Actually we know a lot about asset bubbles, for there have been recorded speculative booms since the Roman times and doubtless before that. Robert Shiller, professor at Yale University, notes that “in the first century Pliny reported a boom in land prices in the vicinity of Rome, a ‘sudden advance’ in prices which he said was ‘much discussed at the time’”. There was of course the famous Dutch tulip mania of 1637, famous I think because of its total absurdity, but there have been many others. Usually there is a thread of reason behind the madness, as there was in the dot-com boom that peaked at the end of 1999. The technologies developed in the 1990s transformed the way we lived and worked for the next 20 years. Tesla will transform the cars we drive in for the next 20 years.
But many people lost a lot of money on the dot-com boom. Vodafone was the largest mobile network in the world in 2000. In March that year its share price reached 480p, bringing huge profits to investors, for at the beginning of 1997 it had been only 62p. But the price fell to 118p by the middle of 2002, and last Thursday it was, wait for it … 122p. Yet it is still one of the world’s largest mobile networks.
So you see the point. Companies can be great companies, producing goods and services the world wants and needs, but investors may buy their shares at the wrong time and lose their shirts.
What next? It is easy to say there is an asset price bubble. It is easy to predict that it will be popped. The hard part is: how and when?
The “how?” will be one of two things. One would be some external event that triggers a change in sentiment. The obvious candidate would be anything that led to a scaling-back of the monetary stimulus, perhaps some tiny rise in interest rates, or an unexpected jump in inflation. That does not look likely right now, but surprises happen. The dollar seems to be weakening, and that could lead to a shift in dollar assets more generally.
The other would be that enough investors decided that they had made their profit and cashed in while the going was still good. That is what happened with the dot-com boom, and seems to me to be more likely this time too.
And the “when?” Deep breath. I am pretty sure it will be this year, with a big shift out of the more frothy investments and a hunt for solid, quality ones. This is not what the price of bitcoin is saying, but that shift may already have begun.
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