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  • 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!

It was called Tulip Mania.

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バブルとは何か?| CNBCが解説します (What is a bubble? | CNBC Explains)

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    kstmasa に公開 2021 年 01 月 14 日
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