What is an Investment bubble?

Bitcoin and bubbles – in our three-part series, we explore what makes bubbles of speculation whether we are currently in a bubble, and how the future might look like. Today: What Investment bubbles?

By Phillip Horch
On 29. June 2019BTC$12.045,00 0.72%part Facebook Twitter LinkedIn xing mail

What is an Investment bubble? The Name reminds us at first – you might guessed it – the soap bubble. The comparison is not accidental: it seems, contains in principle only air, has a short life span and bursts, then, just like that. Investment bubbles are similar. Something is artificially inflated, so that it appears from the outside very much important, and especially valuable, as it actually is. In the hope to get rich quickly, pay people, then prices are too high, without that it would justify the actual value.

Tulip mania – expensive tulips, greedy investors

A popular example of speculative Tulip mania is a bubble in the Netherlands of the 17th century. Century. Tulips were a popular piece of jewelry – especially members of the richer houses decorated their pompous gardens with the beautiful Lily plants. First of all, the members of the noble houses exchanged with each other – after all, you want to get a high level of diversity in its gardens.

Then on the market, the thing took on more and more people realized that the tulips and their bulbs were attributed to a high value. So a wild trade, based on speculation began: people paid money for Tulip bulbs. It moved ultimately, through all layers of the population; behind every Tulip bulb, the promise to get rich hiding all of a sudden. An Investment bubble blew up.

From the Burst of the Investment bubble

The bubble swelled up – while the price rose more, the value is the same, apart from the promise to grow into a piece of jewelry, the cuff much. (You like, you can eat, but the nutritional value is low). Accordingly, the price declined again quickly. Many speculators had gambled away the house and yard, and now sat there with your worthless Tulip bulbs – the bubble was burst.

a factor was largely responsible. The difference between the fundamental value and the bubble component. While the former represents the material intrinsic value of tulips, the latter is broken – strong-down – the Option to make a profit. But we continue to in the future.

The dot-com bubble

An Investment bubble, which is significantly less far back as the Tulip bubble, the dot-com bubble. If it is also a much more recent phenomenon, the mechanism is the same: Many were greedy, invested () a lot of money and lost it.

The talk is this Time from the numerous Start-ups, which brought the New Economy with it. While the Internet began in the 1990s, his triumph, sprouts are the new company from the ground up. And all they promised, as it were, a Golden future, without having sufficient technical Back-up, in order to fulfill this promise ever.

gold rush

And yet, people invested plenty of. Everywhere movement was underway in terms of new technology. Most of the Start-ups went directly to the stock market, most investors bought the shares – in part, just as blind and deluded as so many Dutch investors for centuries before. The Investment property share was socially acceptable – whether or Lieschen Müller or Franz next door – everyone could suddenly buy stocks. This led to the stock market, the eighth in the rating of many companies, from mid – 1999 multiplied-the bubble inflated.

Shut up and take my money!

filled was the dot-com bubble with the hopes and greed of many investors, as well as the Expansion drive of many companies. Who was the IPO’s value, re-invested the funds, while new investors from a double-digit rate in the gate-curly brackets. As a result, established were a lot of day traders, the bubble component were (at least partly) aware of, but, at least, of the daily price increases still benefit. The sentiment was clearly bullish: All ran with the head in the direction of the Investment – “Shut up and take my money” was the currency in many places.

In the year 2000, the bubble was filled to bursting – it was nothing. The stock market value of many companies was not covered by material assets – the capital was not in the classical sense of material goods is tangible. Many of the companies filed for insolvency, there have been reports of fictitious transactions came up. During the air out of the bubble already escaped, clinging, many investors still hope that it would fill up again – and missed the point of the exit.

the value of the Investment bubble

What these two examples show us now? A speculative bubble is a market situation in which prices of (speculative)objects that (are far) above their value. At the beginning, many people expect that you can rich with the sale of objects large profits. That’s why you buy one ultimately a lot of it. As a result, the demand is large. If the investors notice that the price is significantly higher than the value of the goods, uses FUD to sell fast, as long as there is not a total loss there. As a result, the supply increases and prices fall – the air escapes from the bladder. The result: those Who sold in time, winner is the one who comes too late, the capital to be punished.

Many losers, few winners

can Whether the ups is in tulips or Tech Start -: people think that you can earn money with daredevil investment in a short period of time, a lot of money, with Goods whose actual value you do not know and assess. The prices are volatile – they rise and fall in a short period of time in up to two-digit range. If the Investment bubble bursts, then, to lose a lot of their invested capital, while the few left who had the right touch.

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