A Checklist for Spotting Financial Bubbles: Are Cryptocurrencies One?
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31 Years Ago an Economist gave us a Test to Spot Financial Bubbles, does it apply to Cryptocurrencies?
John Kenneth Galbraith wrote A Short History of Financial Euphoria, 31 years ago. The book highlighted the key characteristics of the financial bubbles, from the Tulips crisis of the 1630s to the Stock Market crash of 1987, the later being a bubble burst that he predicted before the event.
In our time, when we are wondering whether cryptocurrencies and the Tech Industry generally are a bubble ready to burst, it is interesting to see if these characteristics are relevant to the situation today;
1.“The extreme brevity of the financial memory”. (p13)
Here Galbraith points to how quickly people forget previous circumstances of bubbles and often repeat the same process, thinking it will be different this time. He gives it twenty years for the financial memory to reset and for a new generation to arise to claim they know better.
Relevant? From 1995 to 2000, the Dot-Com bubble first blew up the Nasdaq by 400% and then spectacularly crashed, almost exactly 20 years ago.
2: “Uniformally, in all such events, there is the thought of something new.”(p18)
p19 “The world of finance hails the invention of the wheel over and over again.”
Relevant? Today Tech companies are allowed to continue to function even though they have significant actual losses year after year after year, on the premise or promise this is a new form of technology.
It is, however, in cryptocurrencies, this characteristic seems most prevalent. We are often told that the currency will change how we function, first as a currency and when that became unworkable as a currency reserve.
3 “Specious association of money and intelligence”.
Here Galbraith points to an essential psychological contribution to bubbles. We associate the money people make with their blinding insight that the rest cannot see, so we follow…
