How to Understand Bubbles and The Standard Bubble Wave

How would you like to go back in time to 2002 and buy Apple and Amazon stock during the aftermath of the original tech bubble crash? I know I would.

Bubbles fascinate me to the point where I’ve become a bit of an historian of them. They’ve happened in every market for as long as markets have existed. The key thing to remember is that, despite the nature of a bubble and the fact that people get burned, they present three of the greatest personal wealth building opportunities out there. These are:

  • profiting as it enters exponential growth
  • shorting it (profiting as it falls)
  • profiting from the slow but beastly rally once the devastation has settled.

There are four distinct phases of the standard bubble wave, as shown in this graph:

bubble-wave-The four phases of the standard bubble wave

1- The stealth phase

In this phase, smart and Big Money, billionaires and visionaries identify an undervalued asset and start to build up a position. For example, in the 1970s the billionaire Bunker Hunt feared the decline of the dollar and started buying up silver at around $6 per ounce. He bought so much that he effectively cornered the market, and by 1980 the price per ounce had spiked to $49.45.

2- The awareness phase

Here, other sophisticated investors pick up the crumbs left behind by the big boys and also identify the undervalued asset, and they start to pile in. You’ll see a nice increase in prices towards the end of this phase, and it’s this increase that acts as a beacon in the sky for the general public.

3- The mania phase

In this phase the public are like a moth to a flame. As soon as they see news articles about great returns and hear about friends getting rich, a massive pang of FOMO kicks in. Welcome to the mania phase (which I prefer to call the media phase because a large reason why the public are ploughing in is the noise made in the press and social media). Cryptos are tiptoeing into the mania phase now but it’s being held back by an abundance of scams, exchanges crashing and fake news. Once the exchanges get organized and the whole user experience becomes simpler, that’s when it will take off.

4- The blow-off phase

It’s evident what happens in the blow-off, or dissipation, phase: a lot of people get financially and emotionally wrecked. Right now, cryptos are making the early adopters plenty of money, but I believe this bubble will pop around mid-2019. That’s my best guess but a better gauge would be market cap. As it stands, the crypto market capitalization (all the money that is flowing around this open market) is $650 billion. When you compare this against the rest of the world’s main markets, it’s tiny. Cryptos are $0.65 trillion, gold is $7 trillion, global stocks are $70 trillion, global bonds are $100 trillion and the currency market is the big dog at $1.4 quadrillion. That’s $5 trillion per day!

Global asset market caps: cryptos compared with the rest of the world’s main markets (T = trillion; Q = quadrillion)
Global asset market caps: cryptos compared with the rest of the world’s main markets (T = trillion; Q = quadrillion)

The thing about the standard bubble wave is that it applies to all bubbles. Whether it’s cryptos or wheat futures, bubbles can happen anywhere and everywhere. The crypto bubble isn’t the only one around at the moment. We have a motor-loan bubble, a student debt bubble, a sovereign debt bubble, a pension bubble, a currency bubble, a bond bubble, a stock bubble and a personal debt bubble. There hasn’t been a time in human history with so many concurrent bubbles. The exciting prospect is that all it takes is just one bubble to pop and initiate a chain of events that could pop every other bubble.

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