This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
Wow. The bitcoin bears have to slink back to their lairs yet again. On Tuesday, it touched a new all-time high of $73,661 (£63,035) at around 9.15am London time, before falling back as traders took profits. That means it has already risen by more than 65 per cent this year, a stunning reversal of the gloom that pervaded the whole cryptocurrency community through much of 2022 and 2023. Go back to the beginning of last year and bitcoin was trading below $17,000 (£13,281).
And now? Well, the immediate target for the bulls is $75,000, but who knows? Cathie Wood, founder and chief executive of ARK Investment Management, believes it will shoot on upwards, calling it “digital gold”. Since she showed huge courage, keeping the faith through the plunge in values, she deserves to be listened to.
The parallel with gold is a helpful way of analysing what is happening. The immediate reason for the surge in price is that it has become much easier to buy and sell cryptocurrencies.
The Securities and Exchange Commission in New York was forced to give permission for 11 exchange traded funds, or ETFs, to trade in it. That made it possible to get exposure to bitcoin without having to own it. It is as though you don’t have to buy a physical chunk of gold but can still benefit if the price climbs.
The result, unsurprisingly, was to boost demand. Make anything where there is a fixed supply easier to buy and it will push up the price; that increase in price will in turn suck in more buyers.
Like gold, bitcoin produces no income, but for many people that does not matter, because they are interested in protecting the value of their assets rather than getting a return on their money.
Like an investment in gold, putting money into bitcoin does not create any additional economic activity. If you buy government or corporate bonds, some, maybe all, of the money will go into investment.
If you buy existing shares in a company the link is looser, but corporations do invest a huge amount and if they have a strong share price can raise more money on the markets should they need to. If you save with a bank or building society, some of that money will go into building new houses. But with bitcoin, or any of the other cryptocurrencies, there is no end investment, nothing at all – just like gold.
Does this matter? Maybe not, but there are two crucial differences between gold and any asset that exists as a series of digits on computers. One is that it has been around much longer. The first use of gold as money, as opposed to simply being an ornament or jewellery, seems to have been around 700 BCE. The other is that central banks hold gold as the principal asset in their reserves – the UK is unusual in that we have very little gold, keeping our reserves in foreign currencies, mostly dollars, instead. Gold is the official hedge against inflation; crypto is the unofficial one.
So what happens next? Well, there is the old stockbrokers’ adage that it takes two views to make a market. The enthusiasts are very clear. These are still early days. Of course there have been setbacks, with savers suckered into buying tokens that ended up being worthless. If you want to have some fun, there is the infamous “You in?” TV advert with Gisele Bundchen and Tom Brady rustling up their friends to invest in FTX.
But Cathie Wood thinks that bitcoin could reach $1.5m by 2030. Her bear case is $258,500, (£201,980) base case $682,000 (£532,870) and the bull case $1,480,000 (£1,156,376). So even if things go wrong, investors will still make a lot of money.
The other view is that crypto-currencies not only have no intrinsic value, but are deeply damaging in economic terms. The most robust version of that view comes from Agustín Carstens, head of the Bank for International Settlements in Basle, Switzerland. He described bitcoin as “a bubble, a Ponzi scheme, and an environmental disaster”. The value is only maintained because new buyers are sucked in, while the energy needed to run bitcoin last year was the same as that of the Netherlands.
It is certainly odd that people buying bitcoin don’t seem to worry about the environmental costs of their actions, whereas many shun investment in the fossil fuels that generate more than 60 per cent of the world’s electricity.
But the market is the market, and for the moment at least the bulls are running strong. It feels as though the present momentum will carry things on for a while yet. But fashions change. It may well be that the environmental damage done by bitcoin will turn holders against it. Or maybe some other snazzy investment product will come along that pushes it aside.
This does feel like a bubble, but bubbles take a while to be popped.
Actually, US equities also feel a bit of a bubble at the moment, accounting for 60.5 per cent of the world market, as the “UBS Global Investment Returns Yearbook 2024“ pointed out. But I think that they, too, may have some way to run, for three main reasons.
One is that valuations are not extreme. The S&P500 index is in a trailing price/earnings ratio of 28, which is high by historical standards of the mean of 16. There is a link here going back to 1872 – I love these very long perspectives. But the prospective p/e, allowing for expected increases in earnings this year, is around 23, again high but not outrageously so.
The second is that this bull market is still quite new. The bottom was in October 2022, so we are less that 18 months into it. Bull markets usually last three to four years, so there should be several months left, and typically you get the best return in the final burst of the market.
The third is that the likelihood in the US post the coming presidential election is for higher spending, a more relaxed monetary policy – and higher inflation. It may be uncomfortable for many Britons to acknowledge this, but a Trump victory might be quite positive for the markets. That is a judgement about the likely impact of a Republican administration, not one about the character of its candidate. And if the present President gets a second term, that too might be positive. We are going to get looser policies either way.
A wealth warning: this may be wrong. There are several things that might happen during the summer, including inflation betting stuck between 3 per cent and 4 per cent, that could unsettle the markets. But for the moment, this bull market still seems to have legs.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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