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It has taken 17 years, significant investment, a string of false dawns and multiple broken promises but finally one of the key innovations to arise from the era of the great financial crisis has done something useful: my son made dinner last night. (I was out, but I gather it was a pretty decent effort at cream of tomato soup.)
Similarly, bitcoin — the bouncing bundle of promise and potential that launched into the world around the same time as Martin kid B — has in the past week or so actually performed a pretty useful service. Proponents have told me for years that bitcoin is money (it’s not, really), that it’s an inflation hedge (come on, now), or that it’s a haven asset for times of stress (LOL), but it turns out that its most useful function is to serve as an early warning system that markets are unwell.
On several occasions of late, it has been a lurch lower in bitcoin that has led a decline in global stocks. It sinks, stocks follow. And it has sunk a lot, down by a third since early October to $84,000 or so. Only another $84,000 to go before it reaches fair value.
Stocks had regained their footing somewhat following a shaky start to the week after robust earnings results from chipmaking behemoth Nvidia on Wednesday. But it was a tumble in the price of bitcoin that soured the mood again on Thursday, and stocks quickly followed. The big beast of crypto is now mainstream investors’ go-to barometer of vibes and speculative exuberance — a genuinely useful application at last.
This could prove to be a very valuable tool for investors as we move on from the debate around whether we are in an artificial intelligence investment bubble — most investors I’ve spoken to recently agree that we are, or at the very least that pullbacks in the coming weeks and months after a spectacular bull run are a near-certainty. Not a crash, necessarily, but a correction, maybe several of them. Instead, the key debate is about whether and when to get out.
The boring answer is to always be diversified, and while that is right, leaning out of big tech stocks does mean you have probably sacrificed a lot of returns this year. Those brave souls trying to time the market face a trickier task. Get out of stocks too early, and you risk losing out on the last rungs of the ladder. Being early is essentially the same thing as being wrong.
This is annoying, for one thing, but for the professionals, it is also potentially career-limiting. No one in fund management enjoys the conversation with their boss to explain why they have trailed behind the most basic stock indices by trying to be too clever. In addition, even if you do, by luck or skill, get out in time, figuring out when to get back in is also a fool’s errand. Too soon, and you lose money and look rather foolish. Too late and you miss those big turning points on the way back up, giving up a surprisingly large amount of performance in the process.
At a presentation this week, Mark Haefele, chief investment officer at UBS Global Wealth Management, reflected on that point. He acknowledges that a lot of “glory and hopes” are now baked into the AI trade, and he’s not “100 per cent sure” it’s going to keep running. But he chooses to be optimistic, is diversifying to try to avoid excessive reliance on a small clutch of stocks, and he’s certainly right that even if this theme does fall over, we could be months, even years away from that happening.
Haefele recounted that in 1999, right before the crash (not a correction, a proper crash) in dotcom stocks, he was running other people’s money and was deeply worried about a bubble, and said so to clients. At the time he was far too bearish. “We felt terrible,” he said. “We were too early and we looked like idiots for a while.” He was later vindicated, of course, but not looking like an idiot is an important, often underrated element of how markets and investment really work.
At Amundi, the Paris-based European asset manager, the mood is similar. Chief investment officer Vincent Mortier said this week that he is concerned about pockets of excessive spending on AI technology and infrastructure. Markets could be at a turning point right now but equally they might pick up again soon.
“You know you are in a bubble when it bursts,” Mortier said. A big drop in big tech stocks could well be a “bloodbath”, he added. But timing is everything. His answer is to hold on to those stocks for now, but to buy insurance policies against a downturn. Hedge, don’t sell, is the motto. Sacrificing a little performance on options that pay out in a downturn is a less bitter pill than selling successful stocks too early.
Mortier has no allocation to bitcoin but he is watching it unusually closely, as it serves as a reminder that “trees are not growing to the sky”.
A full-on market crash at the end of this year or at some point in 2026 is still a tail risk. Pullbacks and corrections, on the other hand, are highly likely. Keeping half an eye on the bitcoin price as a gauge of the market mood might just help in navigating this very challenging period.
katie.martin@ft.com