Ali Hasan
What’s common between Tesla, Bitcoin, the stock market and various other investments? They might be a bubble. But, what exactly is a bubble? A bubble could be any asset or investment which rises up very fast in prices without holding any real value whatsoever.
Anything can be simply a bubble if it doesn’t have strong fundamentals and is rising only because of irrational buying behavior. This has happened before and this will happen again. When did it happen before? Well, the Dot-Com Crisis was a bubble, 2008 Housing Crisis was a bubble, Bitcoin was also a bubble in 2017 when it touched the then all-time high valuation of $20,000 and now Tesla, Bitcoin and the stock market are all being deemed as bubbles.
Why does it matter to you and how does it affect you? We will try to answer these questions and save you from losing all your hard-earned money. So stick till the end to really become one step smart at identifying bubbles and investing your money smartly.
Tulip Bubble
The 1st such instance of a bubble dates back to 1637 when the prices of Tulips reached extraordinarily high levels and then collapsed dramatically in the Netherlands. The Netherland was witnessing a growing economy and people regarded a tulip as a luxury item which caused more and more people to buy them.
This in turn raised their prices. People were buying tulips like crazy and this resulted in an all-time high price of $50,000 for just 1 tulip. Can you imagine? After sometime, the prices were back to normal and the tulips were now treated as a normal commodity.
If you look deeply at a bubble, then there are 5 stages which a bubble goes through before bursting. The stages are as follows: –
- Displacement – In this stage, the people get excited or curious about a new technology, innovative product, revolutionary concept or phenomenon which grabs their attention.
- Boom – In this stage, a price boom is seen in the asset that people are investing in.
- Euphoria – In this stage, more and more buyers try to get in the marketplace and buy the hot commodity being traded. By this point of time, a buying frenzy has been created and they buying behavior isn’t rational or justified in any manner. Some investors begin to realize at this point that they commodity or asset might not be as valuable as deemed by everyone.
- Profit Taking – In this stage, people begin to sell and cash out as soon as possible in order to stop further losing their hard earned money. The prices begin to fall for the very 1st time as bad news starts to circulate all around.
- Panic – This is probably the worst stage to be in as an investor. It’s because now everyone starts to sell even if they don’t gain a penny. The mentality shits from profit making to loss minimizing. Selling, selling and even more selling causes a bubble to burst and end.
A bubble might be a bad concept for the economy but it doesn’t happen each and every time as there are swings in any investment and prices can go up and down anytime for any asset, investment or commodity.
Many investors are fearing that Tesla, Bitcoin and the stock market be in a bubble as their prices have been shooting up without much fundamental value. Tesla’s stock prices have been on a dream run and only time will tell what will happen to them. It could fall dramatically when other car manufacturers start their own lineup of EVs.
On the other hand, Bitcoin and various other cryptocurrencies might be even more volatile than Tesla’s stock as it isn’t backed by anything and isn’t recognized by many governments throughout the world. 3 years before, Bitcoin suffered badly when millions of people lost billions of dollars.
If you take away all the shares and its value of Tesla, you still have their assets and employees who provide value to customers through their products and services but bitcoin doesn’t produce any real value except for being an asset like gold.
Although, the blockchain technology that it’s built on is highly valuable and could serve various purposes in many different industries.
If you take the Indian stock market, Sensex is about to cross 50,000 points for the 1st time and Nifty 50 is about to cross 15,000 points also for the very 1st time. This could also be another huge bubble even when India has made a V shaped recovery.
Many believe that the market could see a huge correction and this could potentially wipe out billions of investor’s money all in a snap of your finger. The market conditions are still pretty bad and the GDP of India is expected to contract by 7.7% in 2021. The market is rising without any real fundamental value.
My advice to save you from a bubble would be to not follow the crowd not matter how convincing people might look. My friend invested some money into Bitcoin in 2017 and lost all his investment. He lost all his money because his timing was wrong and he entered when people were exiting. I warned him to not invest into Bitcoin then as we didn’t knew anything about it in 2017.
He lost all his money because he didn’t make an educated, informed and wise decision. Don’t let that thing happen to you or anyone you know. If you want to invest your money for handsome returns, then always follow some timeless pieces of investing advices which are as follows:
- Only invest in what you understand
- Never follow the crowd
- Do your own research
- Don’t time the market
- Only invest with money you’re ok to lose
- Educate yourself about investing as much as possible
I hope you might have enjoyed this content and I wish that this will help you in identifying a bubble and investing your hard earned money into areas where they actually might be profitable for you.
