The first week in February saw an outsized amount of attention and money poured into previously sad sack stocks such as Game Stop, AMC Entertainment Holdings, and Blackberry. This led to lots of talk about investing bubbles.
For more information on the nature of bubbles, here is an article I posted on Linked In.
Today, for perspective, I’m focusing on past bubbles that you may or may not remember.
TulipMania, 1630’s: A new derivative trading market allowed people to trade in tulip bulbs year round. People mortgage their homes to get in on the action. Someone figured out it was ridiculous and started selling, followed by more selling followed by a panic. The Dutch Golden Age is ended.*
British Railroad Frenzy, 1840s: 9,500 miles of new railway construction is authorized by British authorities. Speculators pile into the market, driving prices of railway stocks ever higher. Citizen protests, high interest rates, and longer than expected building timelines sent prices crashing by 50% over 4 years. Many families lost their savings, but hey, Britain got a huge new transportation infrastructure.
World’s Largest Bubblegum Bubble, 2004: Check out Chad Fell with his 20-inch bubblegum bubble. Surprisingly snarky comments below the article. Can’t we all just be nicer?
Housing Bubble, 2008: “Innovative” mortgage products and low interest rates fuel housing purchases that were mayyyybe unaffordable to purchasers. Housing prices in some cities go up 80%. People start defaulting on their mortgages, lowering the value of mortgage-pool securities that had been sold as safe investments to the public. Previously believed staid banking companies file bankruptcy, stock market crashes, people are evicted from the homes they shouldn’t have been allowed to buy in the first place. You remember.
Bitcoin Bubble, 2015: Here’s an idea! Let’s invent a currency that has no government backing, no bank will store it (held on mysterious servers in the North Pole), and is mostly accepted as payment by arms dealers and pornographers. Who’s in? Apparently, everybody.
I know, I’m going to get backlash for this, because Elon Musk has never been wrong, but I believe the current Bitcoin mania is just another bubble.
Bitcoin does not have income or an asset to sell. Its price depends only on scarcity, not an actual service or good you can use. Remember this when you are looking to get in at ever-escalating prices for an asset that has no profit or loss.
A couple of price points: September 6, 2010, $.06; December 19, 2016, $855; December 11, 2017 $17,549; December 3, 2018, $3,625.** So, yeah, some people bought at $.06 and would have made a killing even selling at $3,600 in 2018. But many more bought in around $15k-$17k per coin and lost a ton of money. And the frenzy continues today, but for how long?
Most of the time we don’t know we are in a bubble until it pops. Other times you can kind of see it coming. Just ask Chad Fell, of the 20-inch bubblegum world record.