📌Stages of a bubble (LUNA)📈🔘📉

12 maj 2022

Fear has a far greater grasp on human action than the impressive weight of historical evidence.” — Jeremy Siegel.

The stages we have seen recently for Luna are very similar to the stages of an Economic Bubble no matter what the market is necessarily , whether it is stock, or cryptocurrency , and other asset classes, It usually happens .

Markets rise and fall, and they can fall quite a bit too—this is what you signed up for. Good times don’t last forever, and neither do the bad time sit’s a cycle. So don’t draw conclusions from the past and project them into the future.
Usually Bubbles can only be observed after they happened, as there are not always clear signs of them visible. But there is strong evidence that almost every bubble was going through the same stages. The Economist Hyman P. Minsky was the first one to outline these 5 stages, and so we will explain them in a little more detail.


Bubbles (financial manias) unfold in several stages, an observation that is backed up by 500 years of economic history. Each mania is obviously different, but there are always similarities; simplistically, four phases can be identified:

• Stealth >>
  Those who understand the new fundamentals realize an emerging opportunity for substantial future appreciation, but at risk since their assumptions are so far unproven. So the “smart money” gets invested in the asset class, often quietly and cautiously. This category of investors tends to have better access to information and a higher capacity to understand the wider economic context that would trigger asset inflation . Prices gradually increase but often completely unnoticed by the general population. Larger and larger positions are established as the smart money starts to understand better that the fundamentals are well-grounded and that this asset class is likely to experience significant future valuations.
  
  
• Awareness>>
  
  Many investors start to notice the momentum, bringing additional money in and pushing prices higher. There can be a short-lived sell-off phase taking place as a few investors cash in their first profits (there could also be several sell-off phases, each beginning at a higher level than the previous one). The smart money takes this opportunity to reinforce its existing positions. In the later stages of this phase, the media starts to notice with positive reports about how this new boom benefits the economy by “creating” wealth; those getting in becoming increasingly “unsophisticated”.
  
  
• Mania>>
  
  Everyone is noticing that prices are going up, and the public jumps in for this “investment opportunity of a lifetime”. The expectations about future appreciation become a “no brainer,” and a linear inference mentality sets in; future prices are an extrapolation of past price appreciation, which of course, goes against any conventional wisdom. However, this phase is not about logic but a lot about psychology. Floods of money come in, creating even greater expectations and pushing prices to stratospheric levels. The higher the price, the more investments pour in. Fairly unnoticed from the general public caught in this new frenzy, the smart money, as well as many institutional investors, are quietly pulling out and selling their assets. Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep asset inflation going. The market gradually becomes more exuberant as “paper fortunes” are made from regular “investors,” and greed sets in. Everyone tries to jump in, and new intrants have absolutely no understanding of the market, its dynamic, and fundamentals. Prices are bid up with all financial means possible, particularly leverage and debt. If the bubble is linked with lax sources of credit, then it will endure far longer than many observers would expect, therefore discrediting many rational assessments that the situation is unsustainable. At some point, statements are made about entirely new fundamentals implying that a “permanent high plateau” has been reached to justify future price increases; the bubble is about to collapse.
  
  
• Blow-off>>
  A moment of epiphany (a trigger) arrives, and everyone roughly at the same time realizes that the situation has changed. Confidence and expectations encounter a paradigm shift, not without a phase of denial where many try to reassure the public that this is just a temporary setback. Some are fooled, but not for long. Many try to unload their assets, but takers are few; everyone is expecting further price declines. The house of cards collapses under its own weight, and latecomers (commonly the general public) are left holding depreciating assets while the smart money pulled out a long time ago. Prices plummet at a rate much faster than the one that inflated the bubble. Many over-leveraged asset owners go bankrupt, triggering additional waves of sales. There is even the possibility that the valuation undershoots the long-term mean, implying a significant buying opportunity. However, the general public at this point considers this sector as “the worst possible investment one can make”. This is the time when the smart money starts acquiring assets at low prices.
  
  
  
  
  

Economic Bubble Summary
With many kinds of economic bubbles in history, we see that there is always a potential for growing a bubble due to our nature. Behavioral economics shows that we follow the herd, we only look at information we like, and we tend to oversee facts because we are gamers by nature.

This will lead also in future to many more economic bubbles which will spur interest from a new technology, new paradigm and finally lead to a new economic cycle which starts after the contraction after a bubble. We will see what bubble will form in the future, and most likely we will only see it coming when it is too late. Especially with leveraged bubbles we will see even bigger impacts on our economy, not just for the specific niche the bubble was built in as the (financial) economy is more interwoven and interdependent globally. We should also not forget that fast spreading media news, social media filter bubbles and increasingly more extremist society, we will have a lot of amplifiers what will help spur new bubbles.


sources: Wikipedia -
transportgeography.org-morethandigital.info-zerodha.com

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