Spring is in the air, and already this year’s tulip season is well underway – tulip mania, that is, or its modern day equivalent in the shape of a booming crypto market.
Recent scandals apparently already forgotten, the price of Bitcoin has surged to new records. The last time it was this high was when interest rates were close to zero.
Most crypto assets don’t pay investors any income, so this made some sort of sense as long as other asset classes were in the same boat; the relative attractions were improved. Crypto is tailor made for the sort of speculative behaviour that low interest rates encourage
But today it’s a completely different story. Official interest rates are at more than 5pc, you can get 4pc plus on ten year US Treasuries, and nearly 7pc on boring old NatWest Group, where the UK government is about to offload much of its legacy shareholding.
It’s the same with gold, which has likewise surged to an all time high over the past month, and also doesn’t pay any income. With gold, one of the world’s oldest currencies, there is at least the allure of a desirable physical commodity to buttress inflated valuations.
Crypto doesn’t even have that; it’s merely a digital token with no intrinsic value whatsoever beyond faith in “the greater fool” theory of investment – that however high the price goes, there is always some idiot prepared to pay even more.
This works well until the music stops, and there are no fools left to keep the whole ponzi scheme going, as has happened on numerous occasions since Bitcoin’s inception.
And yet if they invest in anything at all, the young are today much more likely to choose crypto than ordinary shares, where again there is at least a discernible asset to support the value, however dodgy the underlying company might be.
Beyond crypto’s attractions as an “in crowd” fashion accessory, there are a number of special factors that underpin the current surge.
One is that the freezing of Russian assets has reignited interest in forms of currency beyond direct state control. Another is that a “halving” event is fast approaching, which – without going into the detail of what this entails – reduces the incentives for “mining” new Bitcoin, and therefore squeezes expected supply.
Historically, these events have always coincided with a big rebound in the price. Western threats to seize frozen Russian assets have meanwhile reignited interest in crypto’s original purpose as an asset that hedges against government interference and geo-political instability.
Cheerleaders have also been hard at work lobbying Congress for further regulatory concessions.
From their point of view, it was money well spent, for it resulted last month in approval by the US Securities and Exchange Commission for Bitcoin Exchange Traded Funds (ETFs).
This was the badge of credibility the digital currency had been waiting for. Top drawer fund managers such as BlackRock and Fidelity have been piling in ever since. The SEC had in effect said that crypto was safe.
After the misdeeds of the appropriately named Sam Bankman-Fried, you’d have thought it was all over for crypto.
Bankman-Fried followed in the grand tradition of fraudsters down the ages in seeming to think it was perfectly fine to dip his hand in the till as long as he believed he could make better use of the money. He seems genuinely to have believed he wasn’t doing anything illegal.
If the “Cs” of crypto are as the outspoken economist Nouriel Roubini has said – “concealed, corrupt, crooks, criminals, conmen, carnival barkers” – then the SEC has got its judgement wholly wrong and a lot of innocents are about to lose their shirts all over again.
In my view, they almost certainly will. Asset price bubbles are sometimes quite difficult to identify until it’s too late. Generally there will be some perfectly plausible justification for thinking this time is different. But crypto is plain as a pikestaff.
It is also only the high visibility tip of a much wider phenomenon which has likewise driven a number of stock indices to record levels. Again, this is something of a curiosity, because you don’t generally get buoyant stock markets at a time of tight money, with Europe in recession, China struggling and even the US plainly at some kind of tipping point in the cycle.
It’s true that everyone expects interest rates to start falling from here on in, but it’s also notable that the latest surge in valuations has occurred just as markets push back their rate cutting expectations, with interest rates expected to remain higher for longer.
This by the way is another classic signal of exuberance; when markets begin to believe that all news is good news you know that investors have taken leave of their senses. According to the logic applied, higher for longer is positive because it means the economy is stronger than previously thought.
Look beneath the bonnet, however, and you find that the frothiness in markets is quite narrow and well defined. In the US, it’s been largely driven by the so-called Magnificent Seven – just seven tech giants whose humongous value, driven partly by the distortions of passive investing, grows bigger by the day.
In Europe, we have the absurdly named “Granolas”, a tech and life sciences heavy group of eleven companies chosen by Goldman Sachs as a kind of foil to America’s Magnificent Seven. They don’t come anywhere close, obviously, but they have the same characteristics in terms of hoovering up much of the available investment interest.
Underpinning these focal points for investment pounds, dollars and euros is the great artificial intelligence gold rush, which with some justification is now thought of in some quarters as even bigger than the dot-com mania at the turn of the century.
If we strip these companies out, then stock markets begin to look far less expensive, and in some cases actually remarkably good value – so much so in the case of the UK that the London stock market is beginning to attract a wave of overseas bidders.
Roll up, roll up for the UK’s great bargain basem*nt clear-out. It is as if the entire country has been put up for sale. After attracting two takeover bids in little more than a month, Wincanton, a West Country based logistics firm, finds itself worth twice what it was a few months back.
Overseas bidders can see the value, even if UK investors were unable to. Small wonder the UK stock market is dying on its feet. There’ll soon be nothing left.
In any case, when the bitcoin sell-off comes, it is likely to be quite stock and asset specific. The froth will blow away, but the rest of the market might come through relatively undisturbed.
None of this is to say a crash is imminent. Bitcoin could yet double again before gravity takes hold, such is the madness that grips it. But end in tears it will, as it always does when US regulators loosen the chains on the wild west frontiers of finance.
