“The first speculative bubble was Tulip Bulb trading in Amsterdam from 1634-1637. This is a classic example that almost every professional trader knows about. At the time, brand new financial instruments were developed to facilitate trading and delivery. These contracts became the basis for commodity futures contracts still traded today. Tulipmania was the prototype for every bubble thereafter. Traders bought because prices were going up, which drove prices higher, until there was no one left to buy, at which point prices collapsed. In the 1990s, there was a similar bubble involving a plush toy called Beanie Babies.
In a few years, we might look back at Crypto and NFTs in particular as additional examples of such a speculative bubble. Unsophisticated investors are buying things without understanding how they work. Crypto enthusiast often deride government currencies as “fiat”, but most fail to understand the fragility of the faith required to maintain the value of digital assets. This was evident as Luna collapsed. Even many who bought NFTs don’t understand that they didn’t buy the copyright to the data they’re attached to.
It’s paramount to understand how your investment works. Enron is one of the best examples of this. Their own description of their business was tantamount to “we’re making money, stop asking questions.” So many investors were blinded by greed and should have known better. We saw how that worked out.”