Some crazy facts about Speculative asset Price Bubbles

Discussion in 'Forex - Currencies Forums' started by Daniela-TFC, May 15, 2014.

  1. Daniela-TFC

    Daniela-TFC Active Member

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    Three months ago in my article on Bitcoins I asked the question: “The Bitcoin – just an ordinary Speculative Bubble?”

    Since then a lot has happened.

    The biggest Bitcoin exchange (Mt.Gox) closed its doors and many investors lost a lot of money. I do not want to write about Bitcoin in particular today but instead take a look at some of the biggest market frenzies of all times and some interesting anecdotes.

    The characteristics of an asset price bubble are always the same. Whether the asset is a flower, real estate, an internet stock or a crypto-currency – there is always mass hysteria around that specific asset at the time of the so called bubble.
    A simple rule for you to know when a certain bubble is about to burst is the following: When the bubble is a cover story in the yellow press you know that the bubble is about to burst soon…

    I will not give you details for each bubble – you find all the information well documented on the web. Just keep in mind that the main characteristic – a public mania – is the same for each of the bubbles. I picked three bubbles in particular, there were a lot more of course…


    The Tulip Mania in the 17[SUP]th[/SUP] Century

    The tulip mania which culminated in the first half of the 17th century was the first well documented bubble in economic history. The Dutch were prospering at that time and started speculating with tulip flowers. It ended in a speculative frenzy
    During the height of the tulip mania in 1637 single tulips were sold for more than ten times the average annual income of a craftsman. It did not end well as you can imagine.


    The Asset Price Bubble in Japan in the 1980s

    Japan’s economy was booming during the 1980s. Exports were on the rise year after year, especially the export of cars and consumer electronics. The Nikkei 225 was rallying to record levels and real estate prices in Japan, especially in the Tokyo area skyrocketed. At the peak of the 1980s real estate bubble in Japan the palace grounds of the imperial palace in Tokyo were valued by some being higher than the value of the entire real estate in California, including cities such as San Francisco, San Diego or Los Angeles. Sounds a bit crazy – doesn’t it? Well, it did not end very well of course – the so called “Lost Decade” followed in Japan.


    The Dot Com Bubble

    Due to the increasing commercial use of the internet we have seen huge rallies in dot-com stocks during the second half of the 1990s. Backed by low interest rates and comments from Fed chairman Alan Greenspan internet stocks soared at the end of the 1990s.
    Alan Greenspan repeatedly stated that the (“new”) economy is in a “new era” and “old valuation methods” do not apply for these stocks. Wall Street thanked him for the invitation and sent internet stocks to the sky (and back down to earth in 2000).

    One of the stocks I did like to trade at that time was called Infospace. The old ticker symbol was INSP. The company is one of the few still listed on the NASDAQ but has changed its name since then into Blucora. Follow the link and take a look at the Blucora chart from 1998 until 2014 and you will get a good idea of the internet bubble at the end of the 1990s.
     
  2. TraderJK

    TraderJK Well-Known Member

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    Also add the huge US equity bubble before the crash of 1928 and the massive property bubble leading up to the sub-prime mortgage collapse of 2008.
     
  3. Daniela-TFC

    Daniela-TFC Active Member

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    Thank you TraderJK. Yes, there were a lot more...
     
  4. healthandfitness

    healthandfitness Well-Known Member

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    Good post. The problem with most boom/bust cycles is that the bubble forms when everyone and their mother are in the game. At the apex of the dot com bubble, even taxi drivers and construction workers had a dog in the race. This is an indication that there is a bubble present in the market.

    When bitcoin was relatively unknown to most Americans, and was used mostly outside of the US, it was in a relative safe zone for a while. When the news became widespread that destroyed not only the true value of the crypto-currency, but the very principle that it was built upon. Even before the BT gold rush, the market was inflated to the point the LiteCoin (currency created as an alternative to BT) at a lower rate, was a safer bet than the inflated BT--just like silver is to gold currently.
     
  5. Linda Smith

    Linda Smith Senior Investor

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    The traders who are going to start trading in the forex market need to follow some strategy. If any new traders or beginners want to enter into forex he should know the basics of forex trading. Without the basic knowledge he cannot trade in the forex market. A trader can open a demo account to learn all the basics of forex trading. It will help him to know how to trade, where to trade, when to trade. It has no risk. There is no need to invest capital in a demo account. I also opened a demo account in TP Global FX. I learned all the basics of forex trading from that demo account practically. It is a demo version of a live account. So everything in there is just like a live account. So a beginner can easily learn the basics of forex from a demo account.
     

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