Over the last year since the pandemic first struck, and markets panicked – only to rebound to substantial new all-time highs – analysts have been saying the market is in what they’re referring to as an “everything bubble.”
This all-encompassing everything bubble includes the stock market, housing, cryptocurrencies, and potentially, fiat currencies. To formulate an idea of what the future may hold, we’re looking back at the brief history of market bubbles and providing some key takeaways that can be applied today. We’ll also help explain how to spot the top, what to do when you see it, and what could follow if correct.
Tulip Mania
Much like the United States has been considered the global superpower due to its economic growth, military might, trade, and more, during the Dutch Golden Age, The Netherlands enjoyed such status.
Between 1588 to around 1672, which the Dutch refer to as the Rampjaar, or “Disaster Year,” the country was prosperous. It is considered the birthplace of corporate finance, as well as the first futures contracts. But it was those futures contacts that led to the start of the country’s economic downfall and made it also the birthplace of the first ever bubble.
Unlike today’s bubbles on various assets, Tulip Mania was based on the future settled price of tulip contracts. At the peak of the bubble, according to Wikipedia, a single tulip bulb sold for “more than 10 times the annual income of a skilled artisan.” Research shows that hysteria associated with the bubonic plague might have contributed to both the speculative bubble and its burst – which sounds awfully similar to the situation with the coronavirus pandemic.
Dot-Com Boom
The ‘90s were a time of great technological evolution, which saw the growth of both the personal computer and the internet. What began as cautious skepticism toward things like email, websites, and more, turned into full-blown mania over what the internet could ultimately be.
Major internet companies were building the brands of today at the time, but also got swept up in early overvaluations and unrealistic investor expectations that caused the dot-com bubble to inflate.
When it all popped, the stock market tanked and, in particular, internet stocks. Many brands worth a fortune were nearly wiped out completely during the collapse. From the ashes of the devastation, however, rose the Amazons and Googles of today.
Housing Collapse
The US housing bubble was a major financial bubble that was in part responsible for The Great Recession. Housing prices had peaked just as the subprime mortgage crisis hit, causing the housing market to downward spiral.
Mass foreclosures at the time made matters worse. Because real estate is such a critical piece of the economy, having an impact on homebuilding and therefore lenders and other related markets, other sectors were also hit hard.
Housing valuations are now reaching levels significantly higher than the housing bubble more than a decade ago – is history destined to repeat itself?
Bitcoin And Crypto
Bitcoin and cryptocurrencies in 2017 were also called a bubble, but boy were pundits wrong as Bitcoin was able to prove only four years later. Most bubbles pop, and never again reach such overvaluations.
The dot-com boom was a rare circumstance where asset prices were achievable, but not at the time. Real estate valuations historically rise, so bubbles can repeat when supply is constrained. The real estate model best applies to why Bitcoin is a bubble that repeats every several years, amplified by the asset’s hard-coded halving.
There are only 21 million BTC, and every four years the block reward in BTC miners receive is slashed in half. This sudden imbalance of supply versus demand causes the asset’s price to bubble up every four years. Every time, Bitcoin is called a bubble, and so are the other crypto assets in the industry. But they all always come back stronger than ever.
“The Everything Bubble”
Much like the bubonic plague created the speculative frenzy that led to tulip mania, the pandemic has led to similar investor sentiment sending asset valuations beyond what is realistic. The stock market is overblown, real estate prices have skyrocketed to nearly unaffordable, and there is an abundance of buyers as the economy is on thin ice. The recipe for a disaster is here.
Even Bitcoin and other cryptocurrencies are back as part of this speculative bubble, resulting in BTC at prices of $50,000 and more. The bubble might not be over until the top cryptocurrency reaches prices of $100,000 or more. That is, unless fiat currencies also collapse during this everything bubble.
The dollar itself is in danger as the US government prints unprecedented stimulus money for handouts, while also needing to raise the debt ceiling. The real bubble that is blowing up, is dollar inflation, and the world has never really seen what happens when this bubble pops.
How To Prepare For Everything With PrimeXBT
You can watch for the bubble to pop for major differences in markets. The stock market failing to make new highs, and making lower lows would be the first sign. Housing prices starting to reverse is another. And of course, when Bitcoin and cryptocurrencies start another bear market, are all signs that the bubble has popped.
Using the tools provided by an award-winning cryptocurrency margin trading platform like PrimeXBT can prepare traders for what is to come. Built-in charting tools can help to confirm reversal signals, while a short position and a stop loss order can turn the disastrous situation into a profitable one instead.
Traders can also go long in case the speculative bubble is to keep inflating a lot longer. Markets can stay irrational longer than most traders can stay solvent, which means anything is possible considering the unprecedented conditions created by the coronavirus pandemic,
History has shown that these exact conditions created the biggest and most dangerous bubbles of all. When and if it all comes crashing down is anyone’s guess, which is why you need to be prepared for anything and everything at all given times.
