Understanding bubbles

A bubble requires two things: An overvaluation of fundamentals and speculation.

Speculation will follow any appreciating asset. (A rule of thumb, if you believe something is the next big thing, the market also believes it is the next big thing.)

Speculation creates more speculation, until one day, it becomes clear that the bubble has burst.

The problem is that humans are not very good at seeing.

History is riddled with examples of popular delusions: Alchemy, crusades, duels, fortune-telling, haunted houses and, of course, economic bubbles. Charles Mackay pointed this out here, here and here over 150 years ago.

A year ago, I was introduced to Bitcoin. Since then it has grown over 2,000%. I saw it but not enough to act on it. Today, you might be saying: Its 2017 Bitcoin is different from what we have seen in the past. (It’s not.) Blockchain technology will revolutionize the financial system. (It will but not overnight.)