Bitcoin and How Bubbles Burst

In the financial market, two of the biggest influences are greed and the fear of missing out (FOMO). Every day, investors want to invest in the best securities they believe will dominate the market. This practice is not new.

Past example of bubbles

In the 17th century, in Netherlands, people started buying tulip, which was imported from Turkey. Many people borrowed heavily to invest in the new flower. As the price continued moving up, they continued buying more. Ultimately, the price of tulips dropped and many people lost money.

The same thing happened in the 70s when two heirs started to hoard silver. This was after the end of the Bretton Woods agreement and the price of gold was rising. After inheriting a fortune, they decided to invest the money in silver. They expected its price to track that of gold and it did.

The price moved from below $20 to more than $50. To increase their returns, they borrowed heavily. Ultimately, the price started to drop and the two brothers went bankrupt.

Another recent bubble was in Kenya, where the price of quail birds started to rise. This happened as more people started being aware about the nutritional value of quail eggs. Within less than 6 months, the price of quails moved from around $3 to more than $10. Ultimately, the price dropped because there was no demand for the eggs.

In the stocks market, a recent bubble happened in the late 90s. At the time, investors were so enthusiastic about the technology sector and they were buying anything with a dot com name. As the acquisition binge continued, most investors realized that their investments were worthless. This led to the so-called dot com bubble.

The Bitcoin Bubble

Unfortunately, the long road for the cryptocurrencies appears to be coming to an end ten years after it started. Bitcoin started as a way to make anonymous transactions. It started after the financial crisis of 2008, at a time when trust in government institutions was low.

As Bitcoin started getting attention, its price continued. Other currencies started coming up and in 2017, everyone, including in small villages were investing in Bitcoin. Other currencies like Ripple, Ethereum, and Litecoin came up too.

As this happened, companies started to change their names and strategies. For example, Overstock was a leading e-commerce company. It then changed its strategy and started to focus on cryptocurrencies. As a result, its stock continued to rise. This year (2018), it is one of the worst performing stocks as shown below.

At the end of 2017, their price moved so high that their valuation was more than $800 billion. If the cryptocurrencies were a country, their economy would have been the 19th largest economy. Then, afterwards, the prices started to decline.

The drop in the price of cryptocurrencies was bad news for investors, some who believed the price would reach $1 million.

However, to traders, it was just fine. It was fine because of their ability to ride the upward and downward wave. As it went up, they bought the currencies and as the price moved lower, they shorted it.

External Useful Resources

  • Why The Bitcoin Bubble Will Burst In 2018 - Forbes

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