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…