Investment bubbles are bursting all over the world. Bitcoin, the leading crypto, has lost 55% of its peak value. Luna, another crypto, went to zero in a matter of days. Netflix, a web streaming service and entertainment producer, is down 73% from its peak value. Zoom Video Communications, which provides video telephony and online chat services, has fallen 84% from its peak. The current bubble burst is occurring a little more than the last 14 years, in late 2007 and early 2008. Before that, a big dotcom/telecom bubble burst during 2000 and 2001.
So, what have we learned from the bursting of these bubbles? As Julian Barnes wrote in his novel The Sense of an Ending: “History is the certainty that arises at the point where the imperfection of memory meets the inadequacy of documentation.” This is especially true of investment bubbles. Investors are always in a hurry to forget the last bubble, the errors they made and the losses they incurred. In the process, they rewrite their memories. As John Kenneth Galbraith writes in A Short History of Financial Euphoria, there is an “excessive brevity of financial memory”, the result of which is that any “financial disaster is quickly forgotten”.
Investment disasters are quickly forgotten and we hop on the next big idea as we are told that the next new era is upon us. As Robert Schiller writes in Irrational Exuberance: “Speculative market expansion is often associated with popular belief that the future is bright… The object of speculation in this new era, as Galbraith puts it, is a wonderfully innovative discovery in the financial and macroeconomic worlds.
Take the case of the UK’s South Sea Bubble, which emerged in the early 18th century. The South Sea Company had a monopoly on trade across the South Sea, essentially the Spanish colonies of South America. The company talked about the gold and silver mines of South America and the money that awaited those who invested in its stock.
On similar lines was the Mississippi Company in France. It had a 15-year long lease to develop French territory along the Mississippi River and its tributaries in the Americas. It was rumored that the region was full of silver deposits like the Spanish territories in South America. This was followed by a boom in British shares of railway companies in the 1840s and in bicycle companies in the 1890s.
The New Age thinking of the 1920s in America was driven by the technology-led companies of that era. Some of the market favorites were General Motors (GM), Radio Corporation of America (RCA), Aluminum Corporation of America and United Aircraft and Transportation Corporation.
In the 1990s, the Internet was at the heart of new age thinking. One myth that became established was that Internet traffic was doubling every three months. This led to the belief that Internet access was set to explode, driving up the stock prices of dotcom companies.
In the 2000s, real estate bubbles emerged around the wealthy world. While this was a real estate bubble at the retail level, a lot actually happened on the back-end. The new age thinking then was driven by the fact that the home loan lending bank or financial institution is no longer required to keep it in their accounts until the loan is fully repaid. It can simply secure bundles of debt and sell the financial securities thus created to investors. In the process, an illusion was created that lending had taken a risk. This gave impetus to trading in such financial securities.
Recently, a belief has emerged that a new era of crypto will be upon us and turn people away from government-backed fiat money. This caused the price of crypto to rise in a self-fulfilling cycle by leaps and bounds. As Galbraith notes, prices can be “driven by the expectation that they will go up, the expectation derived from the resulting purchase.”
This does not mean that a new era has not begun in mankind. The fact that we live a much better life than our ancestors simply means that things are better than they were before. However, as Schiller puts it: “The most striking feature of New Age popular thinking is that it is not in constant evidence; Rather, it happens in pulses.” Given that most investors don’t realize it, they learn lessons that were already known.
The phrase “this time is different” is always oversold. So, this time too, as Line was cited by those who bet big on bitcoin and other such things. It was also considered a major defense against government-backed central banks printing bitcoin. Lots of money But the moment high inflation became the order of the day, the prices of bitcoin and other cryptos crashed. Investors sold bitcoins and converted their money into regular cash. Clearly, they still relied on government-backed fiat money more than crypto.
Small-budget retail investors were well motivated to buy crypto. The idea was supported by big financial investors, actors and other celebrities. But the decline in cryptocurrencies may have taught investors a very old investing lesson. In the words of Galbraith: “Financial genius precedes collapse.”
Vivek Kaul is the author of ‘Bad Money’.