I have written about various bubbles in my previous posts and invariably I give example of first known financial bubble called "Tulipmania" which happened in 17th century in Netherlands. Since then every few years we have seen such mania - after all humans do not change. Every generation have their own bubble. During Tulipmania, price of one Tulip bulb exceeded price of average home. In 90's we saw valuation of dot.com companies based on how many "eyeballs" these companies have on their web-sites. As soon as people realized that eyeballs cannot be valued as real assets, the bubble burst. In today's generation, we have "dogecoin". This was created as "joke" crypto-currency in 2013. In 2021, it has gone up by 120,000% despite having no real value. In yesterday's SNL hosted by Elon Musk, Elon's mother hoped that her mother's day gift is not a "dogecoin" which Elon replied "Yes it is".
Why do people chase bubbles? I am no psychologist or economist. But based on some observations, would like to hazard some the reasons people love to chase bubbles.
- By nature humans are "gamblers" or "risk-takers". And in most cases, it worked out well for human race. Otherwise humans would not have ventured out of original place (Africa). We would not have taken adventurous undertakings like exploration of space, moon landing or Antartica. Similar behaviors show up when people are trying to invest in startups, young companies with just an idea or new ways of dealing with money (like crypto-currencies) and it paid off handsomely since some of the biggest companies would not exist if someone had not taken risk.
- Too much money chasing too few "assets" and too much time at hand
- Gamification of investing (thanks to 24x7 trading of cryptos and low transaction fees)
- Protection against "money printing" by central banks all over the world and potential threat of inflation
- Greater Fool Theory - Someone else is fool enough to buy it at higher price at later price irrespective of asset's intrinsic value (or no value)
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