Previous bubbles have driven up the value of investments, collectibles and other odd items to ridiculous levels. It seemed like only a matter of time before prices would crash — and each time it finally happened, it was devastating.
There’s no doubt bitcoin’s price is inflated, but fans of the digital currency say it's different from the other manias that became bubbles. They argue that the blockchain technology underpinning the digital currency will change the way global business works.
Still, that’s only an expectation at this stage.
So, bitcoin buyer beware. Before you fill your digital wallet with bitcoins, learn from these cautionary tales of some of the world's biggest bubbles.
1. Tulip bulbs
The first recorded market crash happened in the 1600s when tulips were exported from Turkey to Holland for the first time.
The novelty of the exotic flowers made them pricey from the get-go, but their value exploded when tulips caught a virus that created flames of different colors on their petals. The new color combinations were then priced based on their relative rarity and desirability.
Investors snapped up so many tulip bulbs that they depleted the market, making highly valued bulbs even rarer. Prices multiplied 20 times over in just one month, until people were trading their homes and life savings for a single bulb.
And then, the bulb bubble burst.
As some savvy investors began selling their tulip bulbs, others followed. The flood of bulbs back onto the market lowered their value until they were worth no more than common onions. The entire tulip market crashed, and Holland fell into a deep recession.
Artificial value inflation can lead to a speculative bubble with any asset, whether it’s tulips — or a virtual currency.
2. Baseball cards
Cards featuring the images of baseball players were first given away in the mid 1800s as promotions with candy and tobacco.
By the 1970s, as kids were spending their pennies to buy packs of baseball cards at five-and-dime stores, a few adult fans were beginning to trade rare antique cards.
Then in the 1980s, the value of baseball cards exploded as financial media took notice and declared that cards were collectibles and investments that would continue to increase in value.
This led enterprising companies to print and sell baseball cards by the ton, though they kept their massive production volumes a secret to artificially stabilize the prices. In 1992, card makers sold $1.5 billion in baseball cards — and congratulated themselves on how they were basically printing money.
But amid a glut of different types of cards, kids lost interest and collectors had trouble deciding which baseball cards had any value. Many were deemed virtually worthless. Today, collectors have returned to focusing on the most expensive antique cards.
Media hype can create the perfect conditions for a bubble. If you're a would-be bitcoin investor and don’t believe in it, don’t buy into it.
3. Beanie Babies
Beanie Babies were originally sold for $5 each, but the relative rarity of some of the cute plush toys had people dropping thousands of dollars to buy just one.
Collectors emptied out their kids’ college funds and filled their garages with polyester toys they thought of as long-term investments. In 1998, $1.4 billion worth of Beanie Babies were sold.
It couldn’t last.
At its core, the Beanie Baby craze was a bubble created by one company. Soon after the toys became popular, creator Ty Warner realized that producing and selling a limited number of each type of Beanie Baby created scarcity.
One collector invented a completely fictional price list and watched in wonder as the market ran with those values. Customer demand — and the Beanies’ prices — went through the roof.
When the company announced it would stop producing the toys, collectors expected their Beanies to explode in value overnight — but instead, interest evaporated and values plummeted. Today the toys are worth about 50 cents each.
Multimillion-dollar businesses have a lot to gain from stoking an investment frenzy — and they don’t care how much you lose. The fact is that promoters create new kinds of “assets” to sell to suckers all the time. With bitcoin, you have to ask yourself: How do we know what it's really worth?
4. The dot-com crash
Today, we’ve all but forgotten that retail giant Amazon is a survivor of the dot-com bubble that devastated investors and destroyed $5 trillion worth of value for tech companies.
In the late 1990s, investors thought internet-based companies were the future and piled insane amounts of money into them. People were quitting their jobs to start day-trading full time.
The problem was they were investing before the firms had made a single penny in profit and were basing their investments solely on the expectation that the companies would succeed.
Media outlets fueled the trend by normalizing this type of speculative investing, while TV networks sold 30-second ad slots during the Super Bowl to dot-coms for $2 billion apiece.
The dot-coms burned through cash without turning any profit, so investing slowed. Stock prices plunged, and more than half the web firms disappeared by 2004. Thousands of tech workers were laid off.
Whether it's a dot-com or a digital currency, don't get caught up in hype! Make sure any investment decision is grounded in reality and not based purely on hope.
5. The housing market crisis
Investors who should have wised up to bubbles after the collapse of the dot-coms instead created a whole new one in the 2000s.
Convinced that real estate would become the next big thing, they rushed to buy homes — and lenders made it very easy. The Federal Reserve says by 2006, about 25% of all new mortgages were subprime, meaning they were given to borrowers with iffy credit.
In hot markets, home prices soared. From 1999 to 2005, they went up 107% in the Washington, D.C., metro area; rose 123% in and around Los Angeles; and surged 128% in the San Diego market, according to research from the Massachusetts Institute of Technology.
But the sky was not the limit.
Demand for houses cooled off, and prices cratered. Many of those subprime mortgages turned into foreclosures, and the colossal losses for lenders contributed to the economic crisis of 2008 and the ensuing Great Recession.
You know what they say about "What goes up." If it seems to you that prices for a thing are rising to ridiculous levels, you're probably right. You don't want to be one of those unfortunate people who buy "at the top" before reason returns.