It seems that each asset bubble has a famous anecdote from someone who claims, being on top, that a collapse is impossible. In the stock market bubble that led to the Great Depression, it was the economist Irving Fisher, who declared in the New York Times that the stock “has reached what looks like a permanently high plateau” a few days before a collapse that would make the shares lost 89% of their value.
In 2007 and 2008, many optimistic statements by the current director of the National Economic Council, Larry Kudlow, turned out to be disastrously wrong. In the big bitcoin bubble of the end of 2017, the honor is for John McAfee, founder of the computer security company McAfee LLC, and passionate evangeliser of cryptocurrencies. On December 7, 2017, he wrote:
A few days later, the price of bitcoin briefly reached US $ 19,511, before it began an epic fall that would cause the original cryptocurrency to lose approximately 82% of that value at the time of writing this column.
Does that mean that the bitcoin is dead?
Not necessarily: the cryptocurrency has recovered from several previous bubbles and falls, including one in 2011 that was just as devastating.
In addition, it is worth noting that even if they have clung to all their bitcoins (in English some call it “HODLed”), the first investors have come out ahead in the last bubble; the current price, although incredibly below the maximum level, is still more than triple what it was when 2017 began. And if they sold some of their holdings at or near the maximum level, as many claim to have done, they are in a better financial condition
But for ordinary investors, who do not tend to enter the initial stage in potentially revolutionary new technologies or have the intelligence or luck to hit the market times, the bitcoin bubble should serve as a learning experience. The most important lesson is: the financial bubbles are real, and will make the savings of your life disappear if you are not careful.
Formally, an asset bubble is just a rapid increase and an abrupt fall in prices
Proponents of the efficient market theory argue that these price movements are based on changes in investor beliefs about the true value of an asset. But it is difficult to identify a reason why any rational investor would have so abruptly modified his assessment of the long-term profit power of the firms in 1929, or the long-term viability of the dotcom companies in the year 2000, or the long-term value of housing in 2007.
Similarly, there was no obvious reason why it made sense for the world to believe that bitcoin was the currency of the future on December 17, 2017, but that thinking about it was a fifth less likely than today. The bitcoin was not overshadowed by a competitor, since the main alternative cryptocurrencies had even higher price drops. Regulators have also not taken energetic action against bitcoin; in fact, the regulatory structure has adapted quite a bit to technology. Neither have there been any critical technological failures: yes, the bitcoin network has registered congestion, but this problem had been anticipated long before the collapse.
Instead, it seems overwhelmingly likely that the spectacular rise and fall of bitcoin was due not to rational optimism followed by sensible pessimism, but to some kind of collective market irrationality, a combination of pack behavior, unscrupulous speculation and entry into the market. the market for a large number of new misinformed investors.
It was this last type of investor that came out the hardest
There are many horror stories about people from all over the world who turned their modest life savings into what seemed like a safe bet, only to see it vanish, a part into the pockets of the aristocracy of the early Bitcoin investors, and the other, becoming smoke.
How can average investors avoid this destination? Bubbles are extremely difficult to detect; if it were easy, they would not exist in the first place. But there are two important strategies that investors can use to limit their risk.
First, understand that there is no such thing as a safe bet. The optimistic history of bitcoin, often repeated by the army of fanatical cryptocurrency online evangelists, was that bitcoin was going to replace standard fiat money as the main world currency. But that story always had big gaps. The fact that it is an asset with high volatility and high expected long-term yields makes the currency bad, since short-term volatility makes it less useful to make payments; You will notice that nobody buys pizzas with gold bullion or Apple stock. Secondly, cryptocurrency is an impressive new technology, but there are important technological limitations related to security and use that have not yet been overcome.
Since nothing is a safe bet, regular investors must stay diversified. It’s okay to put a bit of your savings in something like bitcoins, in case the price goes up a lot, but that is not such a big part. The potential pain of a collapse must be much greater than the fear of missing an opportunity. I myself lost money in the collapse of bitcoin (I still have my bitcoins and I have not sold them). I just did not lose too much, because I only invested a very small part of my assets.
In the end, the bitcoin bubble may have been something beneficial for society. The total amount of wealth involved-a few hundred billion dollars, spread across the world-was small compared to the housing bubble of the 2000s or the dot-com bubble of the 1990s, which means that the impact will be limited. And the experience of such a classic and perfect financial bubble may be enough to teach the millennial generation what their ancestors learned much more painfully: if something seems too good to be true, it usually is.