What you can learn from some of the biggest bubbles in history
What constitutes a speculative bubble? According to a top Wall Street strategist, there are five identifying traits, and Bitcoin fits them all[1]. Investing icons like Warren Buffet and Jamie Dimon refuse to touch the volatile cryptocurrency[2], and the Atlantic even labeled it “the biggest and most obvious bubble in modern history[3].” Others, like the Winklevoss twins, consider Bitcoin much more than another bubble, telling the New York Times, “We still think it is probably one of the best investments in the world and will be for the decades to come [4].”
While the cryptocurrency’s long-term, intrinsic value remains up for debate, we took a look back at major asset bubbles throughout history and the lessons they can teach us today. After all, those who don’t learn from the past are doomed to repeat it.
Tulip Mania
How much would you pay for a tulip?
In 17th century Holland, demand for the perennial plant spurred one of the first speculative bubbles in history. The region began importing the flower from Turkey around 1593[5], and its distinct, vibrant petals soon propelled it to luxury status, making it a coveted symbol of wealth. With demand growing, speculators began to enter the market in 1634. Soon, the general populous began scrambling to buy up the bulbs in an attempt to get their piece of the pie. Some investors even put their homes up as collateral.
Records from the time make it difficult to pinpoint exactly how much prices skyrocketed, but they likely ballooned nearly 2,000 percent over the course of three months in late 1636 and early 1637[6]. By mid-1937, however, prices had plummeted to 1 percent of their previous value — all for a flower that only blooms one week each year.
Takeaway: Just because everyone else is flocking to invest in a particular asset doesn’t mean it’s a good investment. Do your research, and don’t let emotion or fear of missing out drive your purchasing decisions. And don’t forget to apply a healthy level of skepticism when investing in assets with little to no intrinsic value.
The Dot-Com Boom
While the 1630s saw the introduction of tulips to the Netherlands, the 1990s saw the introduction of the World Wide Web — an innovation that caused speculation to soar yet again.
By the late ‘90s, investors were eagerly pouring capital into internet-based businesses, with hundreds of tech companies receiving multi-billion dollar valuations as soon as they began public trading[7]. The problem, however, was that many of these startups lacked concrete business plans, and the frenzy surrounding the boom prompted venture capitalists to largely disregard fundamental benchmarks like P/E ratios. In other words, promises of future profits spurred investments in lieu of proven track records of growth or success.
With a majority of these internet stocks residing within the NASDAQ Composite, the market swelled tenfold from 1990 to 2000. But when industry giants like Dell and Cisco placed huge sell orders on their stocks in early 2000, investors panicked. Within mere months, companies once worth hundreds of millions of dollars lost most of their value, and many collapsed altogether by 2002[6:1].
Takeaway: New industries inevitably inspire surges in investments, but they also carry a significant burden of risk. While it may be clear that the industry as a whole will prevail in the long-term, it can be difficult to pinpoint exactly which companies will succeed along with it.
The U.S. Housing Bubble
Following the Dot-Com Boom, investors scrambled to tuck money into safer assets… or so they thought. As a result, housing prices skyrocketed in the early 2000s, with homeownership reaching an all-time high of 69% in 2005[8].
The U.S. housing bubble stemmed from a multitude of sources: government policies, historically low interest rates, risky lending practices, speculation, etc. Layers of complexity contributed to precarious market conditions that eventually resulted in the total market crash of 2007 and 2008. By 2009, the average U.S. home had lost one-third of its value[9], triggering the biggest economic meltdown since the Great Depression.
Takeaway: If the U.S. housing bubble taught us anything, it’s that there is no such thing as a guarantee. Nearly everyone believed real estate was a safe investment, yet roughly 7 million Americans lost their homes by the end of the crash[10]. And while no investment is entirely risk-free, take a page from Warren Buffet’s playbook and curb unnecessary risk by investing in asset vehicles you understand — a principle he used to evade the economic disasters of the 2000s.
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