Anthony Hilton: Here’s why not to put your money into bitcoin

The father of JFK, Joe Kennedy, once said that he knew the Wall Street crash was coming when his shoe shine boy started giving him share tips. That was 1929.

In more recent times, in London, taxi drivers have performed a similar service. When they start talking about the stock market, indeed more generally when people with no history of investment start asking for share tips, it is a sure sign of trouble.

This week at an event in London where the panel was supposed to be discussing Brexit, the global economy and geopolitical risk before an audience of millennials, all the questions were about bitcoin.

Almost no one in the room had ever even owned a share, but they were fired up by reports that bitcoin, which less than a year ago was trading at $1000 has now exceeded $9000. Would it go through $10,000? Would that be a signal to sell? Or a sign that the next stop was $20,000? Should they take a punt with their housing deposit?

Whether or not it reaches $20,000, the point is that bitcoin is worthless — there is nothing backing it.

It might go from $10,000 to $20,000 or even $50,000 but it is still worthless, unless of course you can find a greater fool to sell it to — that is, someone who is willing to pay more than you paid. If you can’t find anyone to take it off your hands, then it will eventually go back to zero. It is, after all, just an entry on a computer ledger.

To understand this, remember that paper money is worthless too, if you think of it just as paper. It has no intrinsic value. That only comes if people will accept it in exchange for something, like a basket of food or a car, which really is worth something. The value of paper money is inseparable from this confidence that others will accept it, which they mostly do because of the convenient fiction that we can still take it to the Bank of England, or to the US Federal Reserve or whatever national authority is issuing it and get something else — originally a set amount of gold — in return.

In this way ultimately, our trust in money is a measure of our trust in the integrity of our government. But when this confidence evaporates — as in the hyper-inflation in Zimbabwe in recent times, or in the Weimar Republic in the Twenties — it all turns to dust. Once no one believes in the currency and will no longer accept it as a store of value, it goes back to being just paper.

When bitcoin first appeared a few years ago, I wrote in this column that if anyone was interested I would happily produce bits of paper called Hilt-coin, which I would, with equal willingness, sell to anyone prepared to come up with a suitably large sum of money. Nobody did. But in essence bitcoin is simply the computer equivalent of me tearing a page out of an exercise book (being enamoured of old technology) writing my signature on it and saying earnestly that it is money. And, in common with bitcoin, there is no risk of inflation — unlike in Zimbabwe — because once the exercise book is finished, there is no more to be issued.

Most people in the market should understand that the bitcoin boom equates to lunacy but, as in the fable of the Emperor’s New Clothes, no one wants to be the first to say so.