Markets go bust so often we somehow accepted that it is a fact of life. The truth is that financial bubbles can be forecast accurately and prevented successfully way ahead of time.
Our friends at Fortunly explain that the life-cycle of a financial bubble always starts with emotional investing. Overblown asset valuations and irrational expectations always fuel the beginning of an absurd bull run. History gives numerous examples of these.
In 17th-century Holland, the most expensive tulips outrageously cost as much as fully furnished houses. During the 19th century, a 10% deposit caused railway stocks in the United Kingdom to sell like hot cakes.
In the 1980s, fear of inflation triggered the rapid rise in silver and gold prices which fell dramatically in less than two years. By the end of the decade the value of the entire land in Japan exceeded that of the United States fourfold, despite being smaller in size 25 times.
The price of Bitcoin skyrocketed in 2017 from about $700 in January to almost $20 000 in December. The cryptocurrency shed 82% of its value 12 months later.
After extended periods of positive-feedback cycles, the first investors to notice the inflated asset values are always the ones to start the selling frenzy and pierce the previously undetected bubble.
The sharp decline in prices leads to panic. The last ones to react to the sudden market confusion frequently absorb the greatest losses and go bankrupt.
Financial bubbles are unique which is why most economic doctrines and theories fail to accurately anticipate them. They, however, usually share common denominators recognizable enough for anyone (who pays close attention) to see.
To understand how the biggest market crashes in history happened in detail, check out the infographic below!