A financial bubble can occur in any industry: even casino live games can be a part of it. A bubble gives many signs before it appears, and it is even possible to make a profit by following these signs. But if you’re not careful, there is always a chance that the bubble could turn into a financial ruin. Whether it’s the iGaming industry, which includes options like a mobile casino or the construction industry, a financial bubble is always both an opportunity and a danger. So how does a financial bubble emerge and what does it involve? What are the most common examples? You can find answers to these questions below.
What Is a Financial Bubble?
In its most general definition, a financial bubble is when the price of a given asset goes up speculatively for no real reason. There may be many reasons for this price increase, but the result is always the same – the asset price goes much higher than it should be. You can think of this increase as a “bubble.” However, since there is no real reason to support the rise in prices, this bubble eventually bursts, and the price of that asset drops drastically. The burst usually happens when asset owners panic and start selling, but it can also be caused by other reasons.
Financial Bubble Examples
You don’t need to go far back to see how a financial bubble is formed: we saw examples of it in 2005 and 2017. In 2005, the financial bubble occurred in the US real estate industry. People who did not meet the necessary conditions were given bank loans to buy houses. This led to a very rapid increase in house prices: demand was too high, but supply was limited, so housing was suddenly overvalued. But when people couldn’t repay their loans, the bubble burst and house prices dropped drastically in a matter of days. This bubble also triggered the global economic crisis in 2007.
In 2017, another financial bubble was created in Bitcoin. Remember the day Bitcoin prices increased almost 955% overnight? There was no real reason for this increase, but it happened. After some investors began to sell, worrying that prices would go down, an “avalanche” began: Bitcoin prices fell faster than they went up, so the bubble burst.
Both of these examples caused millions of people to suffer both material and moral damage. Small entrepreneurs went bankrupt, countless people lost their savings, and this happened all around the world, not in a single country. So, was there a way to detect these bubbles ahead of time?
Financial Bubble Stages
Overall, it is believed that there are five stages of a financial bubble:
- Displacement: Large investors discover and start buying a low-priced asset.
- Boom: The price of that asset starts to increase slowly. At this stage, the price increase is not fast because the people who invest in assets are still professionals.
- Euphoria: This is the most dangerous and fastest completed stage. Not only professionals but also people who have not done such a job in their life are starting to buy that asset. Imagine your grandmother buying Bitcoin (and this was done by grandmothers all over the world). Asset price is starting to rise at an incredible rate.
- Profit Taking: Large and professional investors start selling assets after making enough profit.
- Panic: Ordinary investors, which means ordinary people who caused the price increase, start to sell as well. This causes asset prices to drop very quickly. Almost always, the price decline is happening faster than the price increase.
There are two things you need to understand from these stages:
- Professional investors are hardly affected by financial bubbles because they know when to start selling. It is always the small investors, the people, who suffer.
- If a certain asset has begun to be bought by everyone, it means that a financial bubble is taking place. By just paying attention to this, you can avoid getting hurt. For example, when you look around right now, you can see that literally everyone is buying Dogecoin. Do you think a new bubble is being created?
What the Next Financial Bubble Will Be?
It is, of course, impossible to predict this with certainty, but although Dogecoin is a highly promising candidate, we believe the next financial bubble will happen again in the banking and finance sector. The reason for this is car loans: in 2017, Americans had close to $1.5 trillion in car loans. Today, this number is much higher, and there is one more problem – Americans are constantly delaying the payment of this debt. In 2013, car loans were paid within an average of 65 months, and in 2018, this period increased to 70 months. The longer the deadline, the more interest we have to pay, and when the time comes to pay, most people (just like in the mortgage crisis) may not be able to do so. This situation could definitely trigger a new crisis.