Von Bitcoin und Blasen: What are investment bubbles?

speculative bubbles

Of Bitcoin and bubbles – in our three-part book we explore what constitutes speculative bubbles, whether we are currently in a bubble and what the future could look like. Today: What are investment bubbles?

„Money alone does not make us happy. It also includes stocks, gold and land.“

The comparison with the soap bubble is no accident: it shimmers, contains only air in principle, has a short service life and then bursts just like that. Investment bubbles are similar. Something is artificially inflated, so that from the outside it seems much more important and above all more valuable than it actually is. In the hope of getting rich quickly, people then pay too high prices without the actual value justifying it.

Everything shimmers so beautifully colorful – but what is behind it?

Tulip mania – expensive tulips, greedy investors. A popular example of speculative bubbles is the 17th century tulip mania in the Netherlands. Tulips were a popular ornament here – members of the richer houses in particular liked to decorate their pompous gardens with the handsome lily plants. At first the members of the noble houses exchanged among each other – after all one wanted to get a high variety in his gardens.

Then the market took up the cause – more and more people realized that the tulips or their onions were ascribed a high value. Thus began a wild trade based on speculation: people paid more and more money for their tulip bulbs. In the end, this spread through all strata of the population; behind every tulip bulb suddenly hid the promise of becoming rich.

The bursting of the bubble

The bubble swelled – while the price continued to rise, the value remained the same – apart from the promise to grow into a piece of jewellery, the tulip didn’t offer much. (One may be able to eat it, but the nutritional value is very low here). Accordingly, the price dropped again quickly. Many speculators had gambled away house and court and now sat there with their worthless tulip bulbs – the bubble had burst.

One factor was responsible for this. The difference between the fundamental value and the bubble component. While the former represents the material intrinsic value of the tulips, the latter – strongly broken down – represents the option of profit. But we are moving further into the future.

Everything bubble or what? From tulip mania to DotCom bubble
The dotcom bubble
The dotcom bladder is a bladder that goes back much less than the tulip bladder. Although it is a much more recent phenomenon, the mechanism was the same: many were greedy, invested (too) much money and lost it.

This time we are talking about the numerous start-ups that the New Economy brought with it. While the Internet began its triumphal march in the 1990s, the new companies sprouted from the ground up. And they all promised a golden future, as it were, without having enough technical back-up to ever fulfill these promises.

Gold rush atmosphere
And yet: people invested – generously. There was a sense of optimism everywhere with regard to the new technology. Most start-ups went directly to the stock exchange, most investors bought the shares – sometimes just as blindly and blindly as so many Dutch investors centuries before. The investment object stock became socially acceptable – whether Lieschen Müller or Franz von nebenan – everyone could suddenly buy shares. This led to the stock market valuation of many companies multiplying from mid-1999 – the bubble swelled.

Much excitement about nothing – little return despite gold rush mood
Shut up and take my money!
The dotcom bubble was filled with the hopes and greed of many investors and the expansion drive of many companies. Those who were worth more as a result of the IPOs continued to invest the funds they had gained, while new investors were attracted by double-digit price increases. In the course of this, many day traders established themselves, who were (at least in part) well aware of the bubble component, but at least were able to profit from the daily price increases. The mood was clearly bullish: everyone ran headlong in the direction of investment – „Shut up and take my money“ was the motto in many places.

In the year 2000 the bubble was then filled to burst – nothing more worked. The market value of many companies was not covered by material countervalues – the capital was not tangible in the classic sense of material goods. Many of the companies filed for bankruptcy, and reports of fictitious sales arose. While the air was already escaping from the bubble, many investors were still clutching at the hopes