Let’s start with some basics here, an economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is a situation in which asset prices appear to be based on implausible or inconsistent views about the future.
In simpler words, an economic bubble is formed due to sudden overvaluation of an asset and the later correction in its value.
So, who can make these bubbles?
Anybody, with a lot of capital at their disposal can form a bubble. This may include an individual, a company or even a group of companies who may come together to raise the value of an asset.
What good does a bubble do?
For an economy? Nothing. But for the investors, it means profits and major profits if it doesn’t get squeezed by a bigger investor (don’t know what a squeeze is? Stay tuned for further post).
How?
When a major investor or group of investors purchase a major chunk in an asset (commodity, equities, currencies, etc.) there is a sudden surge in the price of the asset, this surge is further increased by speculators in search for quick profits. When the price of the asset reaches a margin, the investor start selling the asset as rapid pace hence, making profits on their initial investments hence, bursting the bubble.
A simple recent example of bubble would be ‘BITCOIN’
Here’s what the timeline of this bubble looked like:
- December 17, 2017: bitcoin’s price briefly reaches its all time high of $19,783.06.
- December 22, 2017, bitcoin fell below $11,000, a fall of 45% from its peak.
- November 15, 2018, Bitcoin’s market capitalisation fell below $100 billion for the first time since October 2017 and the price of Bitcoin fell to $5,500. (Wikipedia)
F.Y.I in case you didn’t know the recession of 2008 was due to housing market bubble, where the prices of houses and their loans busted.
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By Bhavik Gandhi December 19, 2019
Easy Economics 