The fun Elon Musk has with Dogecoin shows us the irrationality of value

Central bankers detest them, billionaires joke about them – and the rest of us fret when and how the game will end.

The great debate about cryptocurrencies has taken a new twist in the past few days. Andrew Bailey, governor of the Bank of England, warned that they had no intrinsic value and holders should be prepared to lose all their money.

On the other side of the Atlantic, Elon Musk joked on Saturday Night Live (SNL) about Dogecoin as a Mother’s Day gift, whereupon the price promptly fell by nearly 30 per cent, though it did recover a bit while the show was being aired.

If you don’t follow these things closely Dogecoin was indeed conceived as a joke, a spoof version of Bitcoin, and Elon Musk has been one of its great promoters – he called himself the “Dogefather” and tweets regularly on the matter. I suppose if you are the second richest person in the world you are allowed to make jokes about more or less anything, but in a way he is saying the same thing as Andrew Bailey. There is no intrinsic value in cryptocurrencies, and the value is whatever people are prepared to put on them. That value, as the governor said, is “extrinsic” value.

It is a crucial distinction. Most things have value because they are useful: a washing machine cleans your clothes, a house is somewhere where you can live. Regular money is useful because of its three functions: it is a unit of account, a store of value, and a medium of exchange. You can use it to work out what different things cost. You can set it aside to spend later. And you can swap it for a washing machine or if you have enough, a home.

Other things are not useful but are valuable nonetheless. Three bottles of whisky, the Macallan Red Collection, went for £756,400 at Sotheby’s last November. I think it is extremely unlikely they will ever be drunk, so in that sense they are not useful. But what happened there is part of a current global trend for collectables to be given extraordinarily high valuations. The same goes for classic cars and of course more traditional works of art. The whisky, the cars, the paintings all have extrinsic value.

Those values have no easy reference point – the only guide is what someone will pay. I find it easier to understand why a Ferrari 240 GTO should be worth millions than a string of computer code should be worth anything at all but what any of us think is irrelevant. The market determines the value. And that market is driven by wider forces including current fashions, but especially the amount of money that is available among potential buyers.

So what happens next? There is a growing consensus that there is some sort of asset bubble developing. Jerome Powell, the chair of the Federal Reserve, acknowledged recently that parts of the market “are a bit frothy, and that’s a fact.” Central bankers have traditionally rescued asset prices – and the economy – when there is a slump, but also have to lean against excessive market exuberance when there is a boom. William McChesney Martin, chair of the Fed from 1951 to 1970 famously declared that “The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Well, the party is certainly running pretty hot now, with shares on most markets at or near all-time highs – the UK is a bit of a laggard. So the question is not whether the Fed will take away the punch bowl but when: when will it start to nudge up interest rates? There is a huge temptation to delay a disagreeable policy move. Indeed William McChesney Martin arguably followed too loose a policy in the late 1960s, and the great inflation of the 1970s and early 1980s ensued.

My guess is that the central banks will again act too timidly. They will hope that the growing irrationality of the markets will peter out and they can get away with nudging up rates a little in the back end of this year, rather than anything more disagreeable. The speculators, including those in cryptocurrencies, would then get the blame, not the central bankers. But the bankers will be able to say that they gave us full warning, as Andrew Bailey did – as in a funny way, so too did Elon Musk.