Boom, bubble crash. That is one of the natural cycle of markets. Whenever there is a virtuous circle of capital growth there is likely to be an acceleration of the process.
The process is similar to feedback in a sound amplifier. From a tiny seed, the noise grows until left unchecked the system itself is destroyed.
When there is money to be had in asset appreciation, this signal attracts people to buy those assets and create the very appreciation that attracted them in the first place. This cycle of attraction causes a boom, then a bubble.
As I long ago told a quant measuring the Nasdaq on a log scale. Markets cant grow on a log scale in the short to medium term because the result would be a meltdown. They didn’t agree but the meltdown happened soon enough.
Bubble can be measured on a log scale and so can crashes. However sustainable investment is on a linear scale.
So markets are plagued with bubbles and many people get sucked/suckered in to them because there ability to do so is why they exist in the first place.
Yet whie we might not recognise the bubble we are backing, being that big government, a high tech toy company, the latest tech thingy or mining prospect, most of us can reagnise someone elses bubble pretty easily.
However one of the central causes of bubbles in not well understood.
Major bubbles are caused by the invention of new financial instruments.
The Tulip bubble may have been caused by imprisoned Turkish princes hooked on gradening in their duplex cells, but its driver was options. Option weren’t understood well, in fact not even understood well at all till the 1960s and Black Scholls. The emergence of options was key to that bubble.
Invent paper money and you get John Law’s French Mississippi bubble. Get busy with leveraged equities you are staring at the boom, bubble, bust of 1929. Invent credit default swaps, collateralised debt instruments cleverly tranched and you get a boom bubble and bust that set back the economies of the west for what looks set to be a decade.
Invent a crypto currency and you can expect a repeat of the cycle of boom, bubble and bust.
This might sound gloomy for bitcoiners, but it isn’t necessarily the case, in fact quite the opposite, it might just be great news, at least for crytpcurrencies.
Its important to remember that while the Tulip bubble was bad for the economic and political fabric of Holland, it wasn’t terrible news for Tulips.
Holland may have losts its economic dominance through the resulting economic chaos of that crash, but today Holland still has a billion dollar Tulip business.
Wall Street might have crashed, but the stock exchanges of America are still about fat enough to just about cover the profligate US government’s titanic debt.
Their might have been a huge implosion of CDS, CDO but they are still building houses in America.
It doesn’t matter much to the idea of crypto-currencies whether Bitcoin or its many emulators boom, zoom and crash, there will be crypto-currencies from here on and they will flourish.
They will evolve, the will be regulated, they will be centrally regulated, controlled and likely minted and they won’t bring big government to its knees.
Libertarians, anarchists and miniarchist will be disappointed that the overwhelming state will not be rolled back by crypto-currency, but then they have yet to appreciate that technology is not the friend of the individual. Technology like money or any other power is Pareto distributed. This will always work against the individual.