The different types of bubbles.

[Don Pedro Dinero]

When commenting about bubbles on this forum I’ve talked about two types of bubbles and I’ve seen some other people talking about different types as well. However, I’ve recently found what seems to me the best conceptual division between the different types of bubbles so far.

This is from Spanish forum burbuja.info, which translated into English would be bubble.info:

http://www.burbuja.info/inmobiliaria/burbuja-inmobiliaria/975273-mas-de-10-anos-burbuja-info-y-no-distinguir-diferentes-tipos-de-burbujas.html

“Bubbles are natural phenomena associated with the mechanism of price creation in markets, and have common features where the primitive emotions of investors appear, and their dynamics are dictated by fear.

Although they are all bubbles, they are not the same:

(1) A Ponzi bubble (like that of Afinsa).

(2) A bubble without fundamentals (like that of tulips).

(3) A speculative bubble propelled by credit (like real estate).

(4) An asset bubble with fundamentals (such as the shares of a large multinational ... or bitcoin).

These types of bubbles are of different natures, but they have many common features. The only ones in which the long-term investment has a sense are those of type (4).

In a Ponzi bubble of type (1) the internal mechanisms are opaque, it is a fraudulent scheme that attracts the investor for its greed and guarantee of huge profits, etc ... It is a centralized bubble controlled by an individual or an entity. Word of mouth attracts investors. The bubble lasts as long as new money comes in.

In a bubble of type (2), multilevel marketing is fundamental. There is, in principle, a central organization behind and arise spontaneously. There are no guaranteed returns, but meeting people who multiply their investment by far attracts investors. This happens in all the other bubbles. However, the value of the asset is a mirage and people are blinded by the price. Analyzed coldly they are ridiculous bubbles because the asset really lacks an interest or value that justifies its price. It is thus easy to distinguish them from bubbles of type (3) or (4).

Bubbles of type (3) and (4) are distinguished because those of type (3) are basically based on easy credit (regardless of whether the fundamentals are more or less solid).

Bubbles of type (4) can be produced for different reasons: In the short term by a "squeeze" of the market (shortage of the supply that makes the price explode), and in the long term by some solid fundamentals: For example, viral growth of a new technology.

The fascination of new technologies can cause an overvaluation of the price as we saw in the .com bubble. This does not mean that fundamentals are not good: Simply the expectation they produce inflates the bubble. In a parallel way some startups arise without much foundation that use new technologies as a marketing element.

Bubbles of type (4) are characterized by recovering after deflating (although it may take a long time).


In the case of Bitcoin, the situation is even more complex. It is a new technology, of viral adoption, that represents a new form of money: It is decentralized and deflationary money.

The fundamentals of Bitcoin are solid:

-The total amount of Bitcoins is limited and creates a shortage of supply that can only be compensated with its divisibility and its price increase.

-It is the first decentralized form of digital money. It is the money of the Internet.

-It has better security and transportability properties than fiat money.

-Allows avoiding monetary manipulation of governments.

What we have in the price of bitcoin is an exponential growth that follows the rhythm of viral adoption of a new revolutionary technology.

But it is a bit more complicated ... it is an exponential growth that consists of a succession of bubbles that correspond to the squeeze of the market when viral adoption reaches a new layer of the investor population.

The violence of the bitcoin bubbles are also due to the fact that it has a global market and is easily accessible to a large part of the population. This is something completely new too.

Conclusions:

- We currently have a bubble in the bitcoin price. Neither is the first (it is already the fourth I have lived since 2011), nor will it be the last. As every bubble will explode, but we do not know when (it can rise a lot before doing it). We can expect corrections of 62% (Fibonacci level) or more.

- The long-term trend of the bitcoin's price is the exponential growth while the viral adoption phase lasts, and then a sigmoidal stabilization curve (this is what happens for viral phenomena).

- The fundamentals of Bitcoin are solid, although many do not understand them (to fully understand them, in addition to unorthodox economy, you have to know math, game theory, programming, etc ...)”

Thanks to remonster, member of that forum who wrote the article, for such an in-depth classificaction.

I think it is quite useful as can serve us a starting point if we think that classification can be modified but we see clearly why the tulip bubble and what is happening today with bitcoin is completely different.

[NUFCrichard]

It's a good breakdown. The part about looking from afar and seeing that the asset is possible not really worth anything part stood out to me!
I think a Bitcoin supporter probably sees a number 4 bubble, whereas a hater will see it as a number 2 bubble.

What I do see is a MASSIVE influx of new buyers (I won't say users) who will either be left as bagholders, or will push the price up more, before the bubble pops. It's hard to say which will happen. Other bubbles around at the moment have been going for a long time, like the S&P 500,

[davis196]

The only factor that created this year bitcoin bubble is CME approval and the bitcoin futures trading announcement.It`s ridiculous how a part of the worlds financial industry helps for growing the bitcoin bubble,and the other part of the financial industry is full of haters spreading FUD.
I see aritcles and news about bitcoin being the currency "of the stupid millenials ,who will loose their savings".
The anti-bitcoin hate is all over the place.

[Lancusters]

Bitcoin is not like the classic bubble. Bitcoin has real security of their assets. Part of the capitalization of the bitcoin is inflated by speculators capital, but there are real production which is financed through investments in bitcoin. Look at the stock price of AMD and NVIDIA. All who produce components for equipment for the miners in the black. Electricity producers, too, are not offended.

[Hell-raiser]

The only factor that created this year bitcoin bubble is CME approval and the bitcoin futures trading announcement.It`s ridiculous how a part of the worlds financial industry helps for growing the bitcoin bubble,and the other part of the financial industry is full of haters spreading FUD.
I see aritcles and news about bitcoin being the currency "of the stupid millenials ,who will loose their savings".
The anti-bitcoin hate is all over the place.

We don't know for certain what is on their agendas. The CME approval and bitcoin futures trading announcement may help boost Bitcoin hype initially, as it seems to be the case right now, but when it comes to actual trading, the big fish and sharks of Wall Street may in fact prefer to short Bitcoin massively. it might be easy money for them. And then, as Warren Buffett puts it, we will discover who has been swimming naked when the tide goes out.

[palle11]

The only factor that created this year bitcoin bubble is CME approval and the bitcoin futures trading announcement.It`s ridiculous how a part of the worlds financial industry helps for growing the bitcoin bubble,and the other part of the financial industry is full of haters spreading FUD.
I see aritcles and news about bitcoin being the currency "of the stupid millenials ,who will loose their savings".
The anti-bitcoin hate is all over the place.

The early adopters who didt see the future of bitcoin and sold off at a price they are regretting if they had held on till even when it was $8,000 at least are the heaters.

Whatever bubble has no business with bitcoin especially when you look at bitcoin supply and quantify it with other altcoin.

[high_jack]

There are 2 kinds of bubbles that you have to spot.
1. Ponzi Bubble: People are overrated it , they use the money of new investor to pay for the old investor and boom , things are all gone.
2. Price bubble: People are overrated it , they use news and money to boosting the price to the moon than boom it's back to the real price and you lose much money in it.

[patt0]

Those are nice concepts, and I'm inclined to agree with what was said, and I also consider bitcoin might be the type 4 bubble. In my opinion this means that people should invest with caution, and try to understand it before investing in it. The problem with these type 4 bubbles, is just that. People don't understand it completely, because it's hard to know what to make up of an emerging technology, so they can't really price it correctly. Some know it's good, and even thought they can't really price it, they know it has potencial, but there are others that just go for the ride, because of FOMO. This is what might make the bubble pop, all this emotion behind the investment.

I'm not very worried though, because since BTC has some solid fundamentals behind it, even though it could pop, it will most likely recover after that, as soon as all the emotion disappears, and people start getting in it because of it's real value. It might not even pop at all, because as the development of BTC gets more clear, people might start to understand it, and may actually see that it was still under valuated. Either way, I think bitcoin will have a great future.