What does the speculative bubble mean? Definition, causes and consequences of this explosive situation for international markets. Below is a complete guide for investors and more.
Speculative bubble: what is it and what does this term of a financial nature refer to?
To put it simply, it is an exceptional market situation in which there is a considerable increase, but above all unjustified prices caused by a huge jump in demand in a short period of time. What consequences does it have?
If the meaning of a speculative bubble refers to the prices of one or more goods, it is essential to explain what are the causes and consequences of the bursting of the same speculative bubble.
Definition and Meaning
To establish the definition and meaning of a speculative bubble, we refer, as a preliminary, to the prices of goods on the market.
When we observe an extreme increase in these prices, a definite unjustified increase, then we could be faced with the causes of a speculative bubble.
Precisely this definition has led many analysts to identify first in the Bitcoin}, then in the next tech stocks bubbles ready to burst and this mainly due to of the rally undertaken by the virtual currency and by the actions of the big Internet companies. But even the new and promising green sector is creating fears of explosion.
What are the consequences in the event of an outbreak?
The typologies
In principle, the meaning of speculative bubble almost always refers to financial markets and therefore to equities or bonds. The financial one is the prevailing type of bubble even if there are other categories of fundamental analytical importance.
We are talking about the real estate bubble, whose definition is that of a market phase characterized by a periodic price increase in the real estate sector alone. In this case, the consequences of the bubble bring prices to unsustainable levels that are not proportionate to wages or purchasing power in general. The causes are more or less similar in both cases.
Causes and birth
How does a speculative bubble arise and what are its causes? As we have already mentioned in our definition, in the bubble phase the market is witnessing an increase in prices determined by an increasingly high demand on the part of consumers. The triggering cause is therefore precisely this increase in demand for an asset that is most often considered innovative.
The demand for a particular good increases as the opinion spreads that it will represent a good opportunity to earn and profit from it. The more this belief is shared, the more people will be willing to buy that good and consequently, with the increase in demand, the price of the same will also rise, reaching very high levels.
In this sense, the bubble has a meaning linked more to the psychological component than to the rational one, so much so that very often this particular phase of the market is referred to with the term "mania" or "fashion" linked in particular to the ’introduction of mass innovative goods. Here, in short, how a speculative bubble is born and what are its causes.
The explosion
In our definition, we stated that during the bubble, prices rise exponentially based on the confidence placed in the potential of a given asset. When euphoria towards the same runs out, often for even spurious reasons, we are faced with the bursting of the bubble.
In reality, the causes of the bursting of the speculative bubble do not concern only a reduced confidence in the asset in question. They can also relate to the now excessive price that makes it increasingly difficult to buy, or even the investor’s decision to take profit on previously purchased securities or assets. Here’s how and why a speculative bubble bursts.
Effects and consequences
When this market phase occurs, prices collapse and the consequences return the market to pre-bubble levels. This means that if the value of good X was around 10 euros before the considerable increase in demand, but then rose to 100 euros in the bubble phase, after the burst it will return to 10.
The consequences of a speculative bubble are disastrous especially for investors who can find themselves in conditions of real financial ruin.
The tulipmania
One of the best known speculative bubbles was that of tulips, the so-called tulipmania. We are in the Netherlands, in the first half of the seventeenth century, the price of tulips rises to reach unimaginable levels. All because of the speculation put in place on future tulips (modern futures), later defined as the "trade of the wind". The rare flower becomes an object of challenge among wealthy nobles willing to pay ever higher prices to own it.
Speculation blows up the tulip bubble, prices plummet and hundreds of Dutch men who had invested in the industry fall into ruin, losing every single penny they owned. Tulip mania fully represents the market phases described above.
Here, in summary, what a speculative bubble is and what are the meaning, definition, causes and consequences of the outbreak.
Original article published on Money.it Italy 2022-03-04 13:19:00.
Original title: Bolla speculativa: cos’è? Definizione, cause e conseguenze dello scoppio
