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Bitcoin / Litecoin / Ethereum / alts discussion
- Thread starter mattsk42
- Start date
This is s good article.
How to Spot a Market Bubble
The first sign of a potential bubble, and the easiest to spot, is a rapid rise in prices. The Nasdaq rose 110% in the 12 months before the dot-com bubble crested on March 10, 2000. Home prices in Las Vegas rose 41% in the two years before their April 2006 peak, according to S&P/Case-Shiller.
When bubbles are forming, the price spikes also tend to be interspersed with bouts of panicky selling, says Didier Sornette, who is director of the Financial Crisis Observatory at the Swiss Federal Institute of Technology Zurich.
To help find those patterns in the prices for hundreds of assets, Mr. Sornette and his colleagues enlist the help of a supercomputer named "Brutus."
Another warning sign is when prices break sharply from an asset's underlying value. With stocks, one popular way to measure value is to divide the market's price by 10-year average earnings after adjusting for inflation.
Using that method, the median price/earnings ratio of large U.S. stocks since the late 1800s is 16, according to Yale economist Robert Shiller, a Nobel Prize winner who tracks the data. By contrast, the Shiller P/E passed 44 during the dot-com bubble.
The third indicator of a bubble is that investors and analysts identify an exciting technology or innovation that serves as an explanation for the rapid climb in prices, such as the rise of the Internet in the late 1990s, says the Bank of Finland's Katja Taipalus, whose model is one of a number of tools that many central banks use to help identify bubbles.
As the bubble matures, individual investors pour into the asset, which is akin to "pouring fuel on a fire," says Mr. Mansharamani, who wrote "Boombustology," a book about detecting bubbles. "When there's no one else left to get in, it's almost over."
How to Spot a Market Bubble
The first sign of a potential bubble, and the easiest to spot, is a rapid rise in prices. The Nasdaq rose 110% in the 12 months before the dot-com bubble crested on March 10, 2000. Home prices in Las Vegas rose 41% in the two years before their April 2006 peak, according to S&P/Case-Shiller.
When bubbles are forming, the price spikes also tend to be interspersed with bouts of panicky selling, says Didier Sornette, who is director of the Financial Crisis Observatory at the Swiss Federal Institute of Technology Zurich.
To help find those patterns in the prices for hundreds of assets, Mr. Sornette and his colleagues enlist the help of a supercomputer named "Brutus."
Another warning sign is when prices break sharply from an asset's underlying value. With stocks, one popular way to measure value is to divide the market's price by 10-year average earnings after adjusting for inflation.
Using that method, the median price/earnings ratio of large U.S. stocks since the late 1800s is 16, according to Yale economist Robert Shiller, a Nobel Prize winner who tracks the data. By contrast, the Shiller P/E passed 44 during the dot-com bubble.
The third indicator of a bubble is that investors and analysts identify an exciting technology or innovation that serves as an explanation for the rapid climb in prices, such as the rise of the Internet in the late 1990s, says the Bank of Finland's Katja Taipalus, whose model is one of a number of tools that many central banks use to help identify bubbles.
As the bubble matures, individual investors pour into the asset, which is akin to "pouring fuel on a fire," says Mr. Mansharamani, who wrote "Boombustology," a book about detecting bubbles. "When there's no one else left to get in, it's almost over."
The easiest way to spot an impending bubble burst is when there is a shift from people investing in something because they believe in the long term value of the commodity to people investing in it because they think they will get rich when they sell it. When a certain critical mass is reached of these short term opportunists, any little thing can trigger a panic sell off.
Look at the housing market bubble in the early 2000's. In the few years preceding the bust, there was a flood of millions of new investors buying houses to flip. They weren't actually fixing them or doing anything to add to their real value and they had no intention of living in the houses, they were just buying real estate to hang onto for a year and then sell for a 20 - 25% profit.
In 2006, some markets started seeing rising instances of foreclosures with the resulting slowdown in price increases. By March of 2007, this trend had alarmed banks to the point that a few large institutions stopped investing in bundled mortgages and this resulted in immediate panic. Banks everywhere stopped issuing mortgages and the bottom fell out of the housing market.
No one can predict when a bubble will burst, but it's a lot easier to see that one exists. The way I see it, the crypto-currency market is a textbook example. I wouldn't invest in that stuff with anything I wasn't willing to throw out the window.
Just my two cents.
Look at the housing market bubble in the early 2000's. In the few years preceding the bust, there was a flood of millions of new investors buying houses to flip. They weren't actually fixing them or doing anything to add to their real value and they had no intention of living in the houses, they were just buying real estate to hang onto for a year and then sell for a 20 - 25% profit.
In 2006, some markets started seeing rising instances of foreclosures with the resulting slowdown in price increases. By March of 2007, this trend had alarmed banks to the point that a few large institutions stopped investing in bundled mortgages and this resulted in immediate panic. Banks everywhere stopped issuing mortgages and the bottom fell out of the housing market.
No one can predict when a bubble will burst, but it's a lot easier to see that one exists. The way I see it, the crypto-currency market is a textbook example. I wouldn't invest in that stuff with anything I wasn't willing to throw out the window.
Just my two cents.
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I agree with what you write, but this crypto stuff is what people call asymmetrical investments. You could lose everything and the loss would be very limited (hoping that you don't bet the entire farm) but the upward gains could be incredible, even from this point on.
Lot's of people get rich on market bubbles. Buy on the way up and make sure you sell before the panic hits. The trick is you don't know whether a downturn in price is just a tiny glitch or the start of the big sell off.
If I saw a bunch of experts encouraging everyone to buy a commodity and they offered to sell you their shares, then I would take that as a red flag.
Lot's of people get rich on market bubbles. Buy on the way up and make sure you sell before the panic hits. The trick is you don't know whether a downturn in price is just a tiny glitch or the start of the big sell off.
If I saw a bunch of experts encouraging everyone to buy a commodity and they offered to sell you their shares, then I would take that as a red flag.
I believe it was John F Kennedy's father who said "sell all investements" right before the great depression when the shoe shining man asked him what investments were good. The commoners are a big give away sign.
There are definite signs. You trade long enough, then you see them. The classic one is when GS starts to tell their "little" investors to buy something, you know the big fish have been in the investment for quite some time and they are just waiting for the little guys to pile in. Ride to the top and short it all the way down as they pull out their investments. Horrible. Absolutely deplorable.
Yep, the first bubble in history of humankind I hear.
Personally I think war and prostitution had a bunch of bubbles dating back to the times of King Arthur. LOL
You don't understand or perhaps you think I am onto something you hadn't considered and don't wish to pursue it?
I meant to say i am virtually destitute. Clearer? Enjoy your win.
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I think someone woke up all excited cause its xmas and he hopes he got some bc
If you read the article carefully it says there was a bubble, but that the number of people involved was relatively limited, which could also be said of Bitcoin.
There's
I saw a documentary on the "Asian Contagion" of 1997, which was a tragic crash in currency values of numerous Asian nations. In the early 90's investors around the world shoveled huge amounts of money into the growing Asian economies. By 1997, a noticeable market bubble had grown but the biggest investors continued to encourage their customers to invest in more even though some of them were secretly selling off their own stockpiles.
I admit that I'm not very knowledgeable about how this stuff works specifically, but I've read some historians who claim that the biggest investors manipulated the currencies with insider influence. They purposely over-inflated the currency markets and then caused the collapse themselves so as to take advantage of the exact timing by selling short. A handful of extremely rich men became much, much richer, making hundreds of billions of dollars in the collapse, while a billion ordinary peasants got a lot poorer.
I saw a documentary on the "Asian Contagion" of 1997, which was a tragic crash in currency values of numerous Asian nations. In the early 90's investors around the world shoveled huge amounts of money into the growing Asian economies. By 1997, a noticeable market bubble had grown but the biggest investors continued to encourage their customers to invest in more even though some of them were secretly selling off their own stockpiles.
I admit that I'm not very knowledgeable about how this stuff works specifically, but I've read some historians who claim that the biggest investors manipulated the currencies with insider influence. They purposely over-inflated the currency markets and then caused the collapse themselves so as to take advantage of the exact timing by selling short. A handful of extremely rich men became much, much richer, making hundreds of billions of dollars in the collapse, while a billion ordinary peasants got a lot poorer.
Classic "pump and dump." It's illegal in regulated securities markets.
Something that occurred to me: Classic bubbles either return to a normal market (you can still buy tulip bulbs today, at the garden store), or cease to exist (some Ponzi schemes). But there are also examples of markets that remain in a mode of periodic boom-and-bust cycles forever, such as gold.
If there was a major bust in bitcoins tomorrow, they wouldn't simply vanish, and if anybody had any remaining interest in them, they'd continue to play them. The only way for them to disappear is if people seriously lose interest in them, e.g., if the price falls to the point where it's not worth the transaction cost to do anything but hold onto them forever.
One of the problems with bitcoin is the limited rate of transactions, which also depends on the number of people involved in bitcoin. If it crashed and interest dried up, then it might not be viable as a technology itself. Block chain in general I can see applications for, and is an area I intend to research as there are potential uses in my day job.
