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Most Impactful Economic Bubbles In History

Contributed by Tali Haim
16 June, 2020


When you hear the world "bubble" you most likely think of a giant, soapy bubble a child blows with a plastic wand. Or, if you are a big fan of playing slots at your favorite online casino, titles like Bubble Bonanza may come to mind. However, "bubble" conveys an entirely different meaning in the context of economics, referring to a temporary surge in price followed by a sudden drop.

All Slots Casino delves into the meaning of an economic bubble and the effect this phenomenon has had on the world economy. With pundits predicting another tech bubble on the rise, the economics and factors behind the rise and crash of tech markets are fascinating, if not disturbing.

Defining the Economic Bubble

An economic bubble is known by many names in the industry: asset bubble, tech bubble, speculation bubble. Call it what you will, the definition is mostly the same: a stock market situation in which asset prices are inflated beyond valuations base on unrealistic future predictions. When a tech bubble is discussed, this refers to a strong, yet unstable rise in the market of technology stocks.

Asset or tech bubbles usually are not detectable while occurring but appear sorely obvious after the burst. Looking back on them, the elements leading up to the rise and burst of the bubble seem almost embarrassing.

Major factors usually leading up to a tech bubble include excess capital, often in the late stages of a credit cycle, in need of excess return, or alpha, in saturated markets. Tech bubbles become rampant and unstainable when investors get caught up in the excitement of a new fad. Share prices grow rapidly, at a rate disproportionate to intrinsic value. At the peak of a bubble, fledgling startup tech companies attempt to go public through IPOs (initial public offerings), the bulk of which will fail. Value will likely be generated, but not before investors realize that their expanded expectations will not match the price of the stocks and they will flee in mass exodus. The bubble bursts and generally an economic crash ensues.

On the Cusp of Another Tech Bubble

Because a common trait of tech bubbles is that investors collectively believe an exceptional opportunity is just on the horizon, some pundits believe we are about to fall into the trap of yet another bubble. David Kostin, the chief US equity strategist for Goldman Sachs, has recently warned that current technology stocks are overvalued.

Nearing the situation of the Dot-Com bubble, which will be discussed shortly, Goldman is recommending that investors withdraw tech stocks, especially in the software industry. While Fortune 500 companies like Apple, Microsoft, and Amazon have been valued at more than USD 1 trillion within the last year, more than 360 "unicorns" have popped up (private startups valued at potentially more than USD 1 billion). FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks are still propelling the market forward, but in an age of disruptive technology (tech, like Uber, used to disrupt the progress of traditional services), Kostin sees weaknesses that could lead to the market's downfall.

Three Famous Economic Bubbles That Rocked the World

In the recent past, three major economy and tech bubbles have greatly rocked the stock market, leading to staggering crashes. We highlight them here so you can see how they relate to our current potential situation.

The Dot-Com Bubble: Few economic bubbles have been as notorious as the dot-com or NASDAQ bubble of the late 1990s. The boon of the Internet let to a dot-com boom, scaling up valuations as soon as start-up companies went public. As a result, the NASDAQ Composite leaped from below 500 in 1990 to more than 5,000 in March of 2000. The index crashed soon after, triggering a historic US recession.

The US Housing Bubble: On the smoking heels of the NASDAQ-inspired recession, another bubble began to rise. Fleeing the dot-com market, US investors decided to stake claim in real estate, which they believed was much safer. US house prices did double from 1996 to 2006, but as they skyrocketed, increasing signs of instability appeared, such as mortgage fraud, condo flipping, and sub-prime borrowers buying homes. Finally, housing prices peaked in 2006 and immediately declined. The average US home would lose one-third of its value by 2009. Another economic devastation occurred, the biggest since the Depression of the 1930s. This phenomenon became known as the "Great Recession."

Bitcoin Bubble: The Bitcoin bubble is another cautionary tale. Bitcoin technology stocks dramatically rose from USD 10 in 2013 to more than USD 20,000 in late 2017. Surging up to 2,000% in 2017, the tech had to surrender half of those gains immediately in early 2018. Blockchain start-ups were raising money through initial coin offerings (ICOs), which is trading investors coins or tokens that could be used on a Bitcoin platform or traded for speculative purposes. However, by early 2018 many cryptocurrencies were valued at extremely inflated premiums compared to their ICO price, rendering the original investing price worthless.

Learn from these economic bubbles and be careful with your investments. Maybe spend some money at your favourite safe online casino in Canada and stow away your winnings for the next global recession.



Tags: economics


 


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