There is an old book that is always worth looking through. Extraordinary Popular Delusions and the Madness of Crowds is heavy going. It analyses historical financial bubbles such as the South Sea Bubble and the Tulip bubble. I was given a copy when I first went into investment banking.

Yet it never fails to amaze me how, with the benefit of so many examples of financial bubbles, that we still find new ways to delude ourselves of value.

The collapse of crypto exchange FTX has cast a dark cloud over the world of cryptocurrencies. Indeed, others are failing, and cryptocurrency prices are dropping. But this all begs the question, what is a currency?

When you take a £10 note from someone in exchange for something you give them, you take it on trust that when you come to spend it, the person you hand it over to still believes it has value. To support this, there is a complex system of guarantees and deposits in central banks (The Bank of England, in our case), and a system of laws that underpins the legitimacy of currencies. There is an expectation that the Bank will not print more money, and if it does (under the system of quantitative easing), that new money will be cancelled in the future (that’s another debate for another time!).

In the case of Bitcoin, or the many alternatives, there are no such guarantees or deposits. There is no legal support for these so-called currencies. The element of trust that when you buy a Bitcoin, the next person you sell it to will recognise the same value, is one requires that requires an extraordinary leap of faith. Cryptocurrencies are fiercely volatile so even if you do believe they have value, it is nearly impossible to budget using them.

Having watched them for the last few years, it amazes me that it has taken so long for them to start to collapse. (There is, however, a small argument in their favour, and that is for communities that do not have access to either bank accounts or regular Fiat currencies.)

People can, and have, made money out of trading cryptocurrencies. But to be able to hold on to profits, “investors” need to make sure they are not the last fool buying. If you’re thinking of having a punt, take a look at the Madness of Crowds. It never ends well.