speculative bubble
A speculative bubble is when a price rises far above any sensible value simply because people expect it to keep rising.
In plain English
A bubble is not a lie. It is a shared belief that stopped being checked.
Prices rise. People notice. They buy because prices are rising, rather than for what the thing earns or does. That buying pushes the price higher, which appears to vindicate everybody who bought, which draws in more buyers.
At some point the price has no relationship at all to any underlying value. It rests entirely on the expectation that somebody else will pay more tomorrow.
This has happened with tulips, with railway shares, with internet companies, with houses and with crypto coins. The asset changes and the human beings do not.
What makes bubbles so dangerous is that they punish caution for a long time. The sensible person who stays out watches everybody around them get rich, and starts to wonder whether they are the fool. Frequently they capitulate and buy near the top, which is precisely how bubbles claim their most careful victims.
Nobody can tell you when it ends. That is the whole difficulty.
What you can do is ask one question. If this price never rose again, would this still be worth owning? If not, you are not investing. You are queueing.
An asset triples in six months and everybody you know has made money. You buy at the peak, having resisted for a year. It falls 80 percent. You did the sensible thing for eleven months and the foolish thing once, and once was enough.
Questions people ask
How do I know if something is a bubble?
When the price has lost any relationship to what the thing earns or does, and the main argument for buying is that it keeps going up.
Can I profit from a bubble?
Some do, and the ones who tell you about it are the survivors. You do not hear from the many who were late, and being late is the likeliest outcome.
Why do smart people get caught?
Because a bubble punishes caution for months or years. Watching others get rich is corrosive, and most people capitulate near the top.
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