What is a bubble? | CNBC Explains

It was called Tulip Mania. As the story goes, the prices of tulips skyrocketed here
in the Netherlands in the 1600s, and then crashed. It’s seen as the first example
of an economic bubble. So what are bubbles, and
what causes them to burst? Throughout the years, there have
been all sorts of economic bubbles. Tulips, real estate, dotcom
companies, maybe even bitcoin. But they all have one
thing in common. Investors pay more for an asset than may actually
be justified, resulting in surging, sky-high prices. Let’s use Tulip Mania as an example to
understand the anatomy of a bubble. Economists have laid out five
stages of an economic bubble. Stage one? Displacement. It’s when investors start to get very excited
about a new or innovative product or technology. That’s what happened in the
Netherlands in the 1600s. The country was experiencing a surge in
wealth thanks to booming international trade. Tulips were seen as luxury items. They
were rare, and they take a long time to grow. By the mid-1630s, the Dutch
had gone wild for tulips. More and more buyers drove
up the prices of tulips fast. By some accounts, the price for a single rare
type of tulip bulb was equivalent to $50,000. That brings us to the second stage of
an economic bubble: a price boom. In recent years, we’ve seen this
happen with the dotcom bubble when shares of the NASDAQ, which tracks
tech stocks, spiked in the late 1990s. Or more recently, when the price of bitcoin roughly
tripled in just one month at the end of 2017. Price booms come back to
the simple rules of economics. Let’s say there’s a limited
supply of a product. If everybody wants a piece of it, there’s a lot of
demand. That causes prices to go up. There was only one tulip crop per year. So
there was limited supply and a lot of demand. Because tulips can only be harvested
during certain months of the year, the Dutch starting buying
tulip futures contracts. They were putting a bet on the future price
of a bulb that they didn’t have in hand yet. Even though it was impossible for Dutch buyers
to completely predict the future price of a tulip, they were confident they’d be able to sell
it for a higher price than what they paid. This is the third stage of an
economic bubble: euphoria. It creates a trading frenzy as more and
more buyers try to get in on the market. But then some investors begin to realize that
the actual value of a product, like a tulip, isn’t in line with what they
paid, and so they cash out. This is called the profit-taking
phase or stage four. I mean, could a single tulip bulb
really be worth $50,000? Buyers started to lose trust that they were
worth that much, and so they started to sell. By 1637, the prices of tulips plummeted. Which brings us to the final
stage of a bubble: panic. This is when everyone
realizes how crazy it is that they had paid as much for a tulip
bulb as, say, a house in Amsterdam. That’s when they decide it’s
time to get out of the market. Selling, selling and more selling
ultimately causes a bubble to burst. We saw panic during
the dotcom bubble, as the NASDAQ tumbled around
40% in the second half of 2000. Bitcoin’s plunge in early 2018
suggested that bubble had burst, as the value of the cryptocurrency was
roughly cut in half in just one month. One takeaway from Tulip Mania
or other more recent bubbles is that prices are influenced by how
much buyers are willing to pay. When a group of buyers gets excited about a product,
like a tulip, they might not act rationally about its price. This can make predicting
and preventing bubbles tough. Traders, economists and central bankers all can
get pretty obsessed with identifying the next bubble. After all, the burst of the
housing bubble in 2008 contributed to the worst financial
crisis since the Great Depression. It’s important to know that
not all bubbles do burst. Sometimes price swings are
just part of supply and demand, and don’t have spill over effects
to other parts of the economy. Here in Amsterdam, Tulip Mania
did have one lasting effect. The flowers are still a staple in the
city nearly 400 years after the bubble. Hey everyone, Elizabeth here.
Thanks so much for watching. Where do you see bubbles in the market?
Let us know in the comments section. And while you’re there
subscribe to our channel. Be sure to check out more of our
CNBC Explains videos over here. Talk to you later!

74 thoughts on “What is a bubble? | CNBC Explains

  1. Please explain network marketing in detail with some examples.
    In India a network marketing company named VESTIGE is growing rapidly.
    So I Yaman Gupta wants to know about Vestige in detail through your website and media support.

  2. 5 yrs – We know Bubbles as a character from Powerpuff girls
    8 yrs – We want to blow bubbles of soap.
    16 yrs – The search for bubble butts.
    30 yrs – Watching CNBC explains bubbles.
    P.S – The search for bubble butts still continues.

  3. this is what is going to happen to Bitcoins because more countries are banning the use of it and more countries are opting for making their own crypto currencies ( eg. india , Britain etc ) so the bitcoin value will go down within a few years or the bitcoin bubble would burst and vanishes into thin air.

    #Bitcoins will become History within a few years

  4. I think any tradable asset is a bubble. Some burst and some don't. Commodity, house, crypto, any asset that's influenced my the market. correct me if I'm wrong

  5. Remember everyone, tulips are NOT conversions of exponential amount of raw electricity into unique letter / number combinations that can be uncensorably transfered to anyone in the world without a third party.

    Crypto is not in a bubble. It's in a gold rush.

  6. USD is about to collapse. Yes it is true.
    Russia, Iran and China formed a pact….to destroy USD this month Sep. Russia and Iran to sell oil to China's futures in Yuan to convert to gold. Oil futures in China's exchange about to eclipse Brent and soon surpass Comex in 6 months. Yuan and gold are the oil currency. USD artificial high value to collapse by 30% or more.

    De-Dollarization: Russia Is On The Verge Of Dealing A Massive Blow To The Petrodollar
    Is the petrodollar monopoly about to be shattered? When U.S. politicians started slapping economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States. If it starts trading a lot of oil and natural gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.
    The fact that the Russian government has held a meeting to discuss “getting rid of the US dollar in Russian export operations” should be front page news on every mainstream news website in the United States. That is how big this is. But instead, we have heard nothing from the big mainstream news networks about this so far. Instead, we have only heard about this from Russian news sources such as the Voice of Russia…
    Russian press reports that the country’s Ministry of Finance is ready to greenlight a plan to radically increase the role of the Russian ruble in export operations while reducing the share of dollar-denominated transactions. Governmental sources believe that the Russian banking sector is “ready to handle the increased number of ruble-denominated transactions”.
    According to the Prime news agency, on April 24th the government organized a special meeting dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.
    The “de-dollarization meeting” was chaired by First Deputy Prime Minister of the Russian Federation Igor Shuvalov, proving that Moscow is very serious in its intention to stop using the dollar. Sell dollar and buy gold.

  7. Well, it’s a subjective state as to what a bubble actually is until it becomes known that most people are simply following others in their expectations, not knowing the ‘hows’ of the deal. And this emotion reinforces itself raising expectations whilst self-sufficiently supplying evidence to justify what is otherwise unjustifiable. It’s a consequence of bounded rationality mixed with craziness.

  8. So do I get this correctly:
    1. There is a high demand for houses but few houses.
    2. Rich people see this and buy houses or construct them and sell them for a high price.
    3. People can't afford houses and moves into apartments.
    4. People want to get rid of their worthless houses and starts selling them maybe for even less than what they bought them for. Making them lose money and if they've invested a lot into houses they might go bankrupt.

    How exactly does this become an economic crisis?

  9. Next bubble lies in Silicon Valley! Too many copy cat products/services, let alone the fraudsters ….fake it till you make it…. valuations becoming a JOKE! Individual/Institutional investors are pouring the money without realising the financial structure and foundation of startups are weak. Unlike 2008, banks are stronger now….however, people have been caught in the euphoria of these startups! Valuations in billions while yet to make break even nor profit is depressing. The storm is coming!

  10. great content on bubbles… now i have a target price for the next euphoria… thanks for sharing (8k to 50k)

  11. I look at the housing crisis in California, pos housing has reached 1 million..why? Even apartments housing is going crazy for demand. Eventually people will wise up.

  12. In Russia i see bubble in real estate and high debt of poor people…
    In USA maybe in cost of Education

    Globaly – social media… 🤔

    One that when you least expect it will explode.

  14. The greedy politicians around let the take overs share money for the politicians incomes?
    If people like juliany let us behave in a few days manhatan can control the main acces to manhatan.

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