As new technologies or new opportunities arise, early adopters and keen investors look for a chance to make an extreme profit. Once more participants enter, prices can skyrocket creating a bubble. However, as the financial bubbles throughout history prove, these streaks don’t last forever.
Check out our list of the nine most devasting economic bubbles throughout history below.
9 Financial Bubbles Throughout History
One of the most amazing attributes of every bubble is that caution seems to be thrown away as investors and participants try to rationalize extreme prices. Usually, these include claims that a new norm and a new investing environment has been created.
At the end, reality always strikes, as with each of the financial bubbles listed below.
#1: Tulip Bulbs (1634 – 1638)
Introduced to Western Europe in the mid-16th century, Dutch collectors created a hierarchy of tulip varieties and assigned values to the various flowers. But, it was impossible to tell which variety would bloom with a particular bulb, which led to speculation.
Originally only of interest to the wealthy, by the mid-1630s the strategy caught on with middle-class and poorer investors, who, at the height of the craze, began mortgaging their homes as collateral hoping to sell at a higher price and get-rich-quick.
Of course, the tulip bubble burst. And, while it’s difficult to determine exactly how much prices soared (and then fell), prices were driven by greed and the fear of missing out. Once some larger investors pulled out, the prices collapsed.
#2: South Sea (1719 -1720)
The South Sea Company was awarded annual interest payments from the British government and a monopoly on trade with the South Seas and South America in exchange for converting government war debt from the War of Spanish Succession into its own shares.
As soon as the plan was announced, the company’s shares rose as speculators invested in the future successes and the company offered several new stock offerings. From January 1720 to June of the same year, the company’s share prices shot up from 128 pounds to 1,000 pounds.
Just as quickly, the bubble burst and left thousands of overextended investors holding heavy losses, as by the time December of 1720 rolled around, the stock price was down to 124 pounds. By 1722 the price per share had dipped below 100 pounds.
#3: The Mississippi Bubble (1716 – 1720)
In order to help pay off France’s war debts, Scottish economic theorist John Law created a national bank that would accept gold and silver deposits and issue paper money or bank notes in return. A year later he formed the Mississippi Company that was given a monopoly over France’s Louisiana Territory.
Law began selling stock in the company and public interest quickly reached a fever pitch. In less than a year, the price per share jumped from 500 livres to 18,000.
Problems arose when the bank issued more paper currency than it received in gold and silver which created an inflationary economic bubble boom. In addition, the Mississippi Company never found riches in the Americas.
In 1720, suspicious investors went to redeem their paper notes and found there was only enough gold to cover a fraction of their claims. Overnight, many new millionaires lost their fortunes.
#4: Florida Land Boon (1920 – 1926)
After World War I, Florida was still largely unpopulated and advertised as a tropical oasis. This matched up with the economic boom of the 1920s and many Americans headed south. By the middle of the decade, home prices started doubling every couple months.
According to reports, in some cases speculators didn’t even need the cash for their purchases. Instead, they simply made the down payment and resold the property at a profit before the full balance was due.
Then, in early 1926, supplies of building materials and potential buyers trailed off, causing investors to sell their holdings at astronomical losses. By 1928, Florida’s bank clearings had plunged from over $1 billion to less than $150 million.
Charles Ponzi Strikes Again
Notorious for creating a new type of financial scheme in 1920, Charles Ponzi was one of many hucksters who jumped on the Florida land boon and tricked out-of-state buyers into purchasing plots of land he claimed were in Jacksonville, when in reality they were in a swamp roughly 65 miles away.
#5: Financial Crash (1929)
The Roaring Twenties brought a boom to the stock market and the economy in general (see the Florida Land Boon above) unlike anything the world had seen. Thousands of families took out loans and invested the money as the stock market quadrupled from 1920 to 1929.
Optimism ran rampant as even some of the nation’s most respected economists promised that the bull market would last for years. Then, on October 24, 1929, also known as Black Thursday, stocks nosedived and investors made roughly 13 million trades.
Days later, on Black Tuesday, the market dipped even further. But still, the market hadn’t hit its bottom. That came more than two years later when the Dow had fallen 90% from its 1929 peak. The Stock Market Crash led to the Great Depression, which lasted for roughly ten years and caused about 4,000 banks failed by 1933 as people rushed to take their money out.
#6: Japan’s Economic Bubble (1984 – 1989)
Starting in the 1960s, Japan’s economy grew faster than the rest of the world, which led to deregulation and a looser monetary policy. As money supply increased and interest rates fell, there was easier access to credit. In the early 80s, the yen surged 50% and triggered a Japanese recession in the 1986.
But the country tried to counter by easing the money policy even further through monetary and financial stimulus, which led to speculation in Japanese stocks and urban land values tripling from 1985 to 1989.
At its peak, the Imperial Palace grounds in Tokyo had more value than the entire real estate market of California. The bubble burst in early 1990 and directly led to Japan’s lost decades of the 1990s and early 2000s, where the country had slower economic growth than any other major industrial nation.
#7: Black Monday (1987)
The largest one-day crash of the stock market came in 1987 on the heels of a bull market that started in 1982 and accelerated in the mid-1980s thanks to hostile takeovers, leveraged buyouts, and a number of mergers.
From 1986 to the fall of 1987, the Dow nearly doubled. Then, on Monday, October 19th, there were a number of aggressive sell orders causing other investors to panic, which set off even more sell orders.
By the end of the day the Dow had lost 22.6% of its value, or about $500 billion.
#8: Tech Bubble in 1990s – 2000s
The introduction of the Internet created thousands of new businesses that would capitalize on the new economy. The NASDAQ Composite, which was the home of many of these technology and dot-com companies, skyrocketed from 500 in 1990 to over 5,000 in March of 2000.
This wave of investing led to companies soaring in value even though they had negative earnings or astronomically high valuations. For instance, hundreds of dot-com companies achieved multi-billion-dollar valuations as soon as they went public.
Soon after the peak in March of 2000, the tech stock bubble popped and the NASDAQ plunged to nearly 1,000 in 2002 and sending the U.S. economy into a recession. It took until 2015, for the NASDAQ to reach a new high.
#9: Housing Market of (2002 – 2009)
The most recent bubble is still affecting politics, financial regulations, and the way we think about money today.
Housing prices in the U.S. nearly doubled between 1996 and 2006, two-thirds of which came between 2002 and 2006. Lax regulations led to sub-prime borrowers being approved for multiple mortgages, rampant mortgage fraud, and houses being flipped like it was Florida in the early 20s.
Housing prices peaked in 2006 and lost nearly a third of their value over the next three years. This started a domino-effect, impacting mortgages, banks, and lenders, as well as homeowners, and eventually led to the largest economic contraction since the Great Depression.
5 Steps of a Bubble
Although there are different interpretations of a bubble, and different stages, many economists agree on the consistency of the general pattern bubbles follow.
- Displacement: investors become enamored with a new technology or economic environment
- Boom: prices rise slowly at first, then gain momentum as more participants enter the market
- Euphoria: at this point, prices skyrocket as caution and historical valuation measures are thrown to the wind
- Profit Taking: at this stage smart investors begin to pull their money out and take profits before the bubble bursts
- Panic: once an event sets the trend in motion, prices plummet and usually prices descend as rapidly as they had ascended
Is Bitcoin a Bubble About to Pop?
Bitcoin’s surge has been well-publicized, so it will come as no surprise that many famous investors have steered clear of the cryptocurrency. Or, if they had invested, have already sold to take profits (or losses depending on when they originally invested).
Based on the five stages listed above, some investors feel that bitcoin is currently in the taking-profits stage. From here, it will only take one event to send prices plummeting and for panic to set it.
While it looks as though Bitcoin continues to surge, as of July 2018, the priced had dropped below $7,000. Plus, there are a number of factors working against the continued and sustained growth of bitcoin, some of which include:
- Regulatory crackdowns from agencies such as the SEC
- Potential hacking threats to cryptocurrency exchanges
- Slump in the number of transactions
- High use of electricity for bitcoin miners
- High-profile detractors from financial world
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