by Tom Taulli | November 19, 2013 3:15 pm
While the value of Bitcoin plunged from $900 to $540 over the past day, gains for the year have still been massive. Back in January, Bitcoins were trading at only $20 each. Now, many are questioning whether the rapid rise means Bitcoins are sitting on a bubble.
Interestingly enough, Bitcoin might be just one of many — InvestorPlace editor Jeff Reeves has identified four other potential bubbles, for instance. Not to mention, there are various individual stocks that are fetching outsized valuations including Tesla (TSLA), Twitter (TWTR) and Voxeljet (VJET).
But bubbles are actually fairly common throughout history, often the result of a megatrend like railroads, autos and PCs. Unfortunately, the endgame is always the same: huge losses for investors.
Here’s a look at four of the most interesting bubbles across history.
That’s right, tulips. For the Dutch, they were an exotic import from Turkey and became instantly popular. Tulips became a must-have status symbol for 17th century Dutch citizens.
It didn’t take much to juice the prices since supply was low (tulips take years to grow). At the height of the bubble, a pound of tulips would be worth as much as a nice waterfront estate.
But there was not enough buying power to keep up the momentum and the plunge was swift, which came in early 1637. In the wake, the Dutch economy suffered a grueling depression.
Things weren’t looking good for the U.S. during the late 1970s. There was the Iranian hostage taking, the Soviet invasion of Afghanistan, a spike in oil because of OPEC, soaring interest rates and a rising unemployment rate.
Seeking a safe haven, investors bought up huge amounts of gold. From 1979 to 1980, the price skyrocketed from $240 per ounce to $850. But it soon collapsed when the Fed Reserve severely tightened money supply, which killed inflation.
But gold wasn’t the only precious medal to go into the bubble-phase. Silver also staged a huge run. A big part of this was from the buying of billionaire brothers Bunker and Herbert Hunt. They inherited an oil fortune but thought that capitalism was on the verge of failure. So they stored large amounts of silver in Switzerland, which they believed would be protected in the event of a Soviet invasion.
At the height of their buying, the Hunt brothers accumulated a large part of the world’s supply of silver — a classic cornering of the market.
But COMEX and CBOT were not happy about this activity and raised the margin requirements, which popped the bubble. It would result in a bank bailout and the personal bankruptcies of Banker and Herbert.
Japan benefited from tremendous growth in the 1980s, thanks to exports from companies like Honda (HMC) and Toyota (TM). That growth meant a booming stock market, which became the source of a speculative frenzy. From 1984 to 1989, the Nikkei surged from 9,900 to 38,915. A big catalyst was an easy monetary policy, which also inflated the value of real estate. The Imperial Palace alone was worth more than all the real estate in California.
But when the Nikkei collapsed, so did the Japanese economy, creating a slow-growth economy that lasted for more than two decades.
Not long after, the U.S. had a similar speculative stock bubble in the 1990s. This time, the driver was the Internet revolution. Just about any company that had a dot-com at the end of its name could fetch multi-billion dollar valuations.
It was the kind of fuel that made NASDAQ go parabolic, spiking from 1,600 in 1998 to a peak of 5,048.62 on March 10. But as with most bubbles, the fall was quick and brutal. Within about a year, the index lost more than half its value.
Ty Warner came to LA in the 1960s to realize his dream of being an actor, but soon realized that was not a good career move.
Instead, Warner took a job at a toy maker. While there, he got an idea for his own company, Ty, which would eventually make him a billionaire. His concept was to sell plush toys, called Beanie Babies, as collectibles in the early 1990s. They quickly became hot items as millions of people bid up the prices.
As for Ty, he was smart to diviersify his wealth into investments like hotels and golf courses. But collectors were not so lucky, as the prices of Beanie Babies eventually collapsed. Warner’s career hasn’t gone entirely unmarred, however. He was recently in the news after pleading guilty to tax evasion.
The lesson: Beware bubbles.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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