tag:theconversation.com,2011:/id/topics/dotcom-bubble-10463/articlesdotcom bubble – The Conversation2023-01-27T17:04:19Ztag:theconversation.com,2011:article/1986822023-01-27T17:04:19Z2023-01-27T17:04:19ZBitcoin has shot up 50% since the new year, but here’s why new lows are probably still ahead<figure><img src="https://images.theconversation.com/files/506823/original/file-20230127-16-4cgk1e.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Up, up and ...</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/golden-bitcoin-digital-currency-futuristic-money-1653739108">CKA</a></span></figcaption></figure><p>To the delight of investors across the cryptosphere, the price of bitcoin (BTC) has rallied over 53% since its low of US$15,476 (£12,519) in November. Now trading around US$23,000, there’s much talk that the bottom has finally been reached for the leading cryptocurrency after a year of painful decline – in November 2021, the price peaked at almost US$70,000. </p>
<p>If so, it’s not only good news for bitcoin but the whole market in cryptocurrencies, since the others broadly move in line with the leader. So is crypto back in business?</p>
<h2>Dotcom lessons</h2>
<p>The past is littered with various periods of market turmoil, from the global financial crisis of 2007-09 to the COVID-19 collapse in 2020. But neither of these is a particularly good comparison for our purposes because they both saw sharp drops and recoveries, as opposed to the slow unwinding of bitcoin. A better comparison would be the dotcom bubble burst in 2000-02, which you can see in the chart below (the Nasdaq is the index that tracks all tech stocks). </p>
<p><strong>Nasdaq 100 index 1995-2005</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506820/original/file-20230127-20-zmaqij.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Look at the bitcoin chart since it peaked in November 2021 and the price action looks fairly similar: </p>
<p><strong>Bitcoin bear market price chart 2021-23</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506783/original/file-20230127-22-fi77rv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>Both charts show that bear markets go through various periods where prices rise but don’t reach the same level as the previous peak – known as “lower highs”. If bitcoin is following a similar trajectory to the early 2000s Nasdaq, it would make sense that the current price will be another lower high and that it will be followed by another lower low. </p>
<p>This is partly because like the 2000s Nasdaq, bitcoin seems to be following a pattern known as an <a href="https://www.investopedia.com/terms/e/elliottwavetheory.asp#:%7E:text=The%20Elliott%20Wave%20theory%20is%20a%20form%20of%20technical%20analysis,that%20oppose%20the%20larger%20trend.">Elliott Wave</a>. Named after the renowned American stock market analyst Ralph Nelson Elliott, this essentially argues that during a bear phase, investors shift between different emotional states of disappointment and hope, before they finally despair and decide the market will never turn in their favour. This is a final wave of heavy selling known as capitulation. </p>
<p>You can see this idea on the chart below, where bitcoin is the green and red line and Z is the potential capitulation point at around US$13,000 (click on the chart to make it bigger). The black line is the path that the Nasdaq took in the early 2000s. The blue pointing finger above that line is potentially the equivalent place to where the bitcoin price is now. </p>
<p><strong>Bitcoin now vs Nasdaq in the early 2000s</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=358&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=358&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506821/original/file-20230127-3270-sl362z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=358&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span></span>
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</figure>
<p>The one other thing to note on the chart is the wavy line that’s moving horizontally along the bottom. This is the <a href="https://www.investopedia.com/terms/r/rsi.asp">stochRSI or stochastic relative strength index</a>, which is an indication of when the asset looks overbought (when the line is peaking) or oversold (when it’s bottoming).</p>
<p>A sign of a coming shift is when the stochRSI moves in the opposite direction to where the price is heading: so now the stochRSI is coming down but the price has held up around US$23,000. This too suggests a fall could be imminent. </p>
<h2>The game of wealth transfer</h2>
<p>Within markets, there is often a game that investors from institutions such as banks and hedge funds play with amateur (retail) investors. The aim is to transfer retail investors’ wealth to these institutions. </p>
<p>This is particularly easy in an unregulated market like bitcoin, because it is easier for institutions to manipulate prices. They can also talk up (or talk down) prices to stir up retail investors’ emotions, and get them to buy at the top and sell at the bottom. This “traps” the irrational investors who buy at higher prices, transferring wealth by giving the institutions an opportunity to convert their holdings into cash. </p>
<p>It therefore makes sense to compare how the retail and institutional investors have been behaving lately. The following charts compare those crypto wallet addresses that hold 1 BTC or more (mostly retail investors) with those holding upwards of 1,000 BTC (institutional investors). In all three charts, the black line is the bitcoin price and the orange line is the number of wallets in that category. </p>
<p><strong>Retail investor behaviour</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506787/original/file-20230127-12-9lnq48.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 1</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=349&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=349&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506831/original/file-20230127-23-4dwklf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=349&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 1,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p><strong>Institutional investor behaviour pt 2</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=282&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=282&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=282&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=354&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=354&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506789/original/file-20230127-21-6vw6f7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=354&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows all wallets that hold at least 10,000 BTC.</span>
<span class="attribution"><a class="source" href="https://glassnode.com/">Glassnode</a></span>
</figcaption>
</figure>
<p>This shows that since the <a href="https://theconversation.com/i-thought-crypto-exchanges-were-safe-the-lesson-in-ftxs-collapse-195800">FTX scandal</a> back in November, which led to the world’s second-largest crypto exchange collapse, retail investors have been buying bitcoin aggressively, resulting in the highest number of addresses holding at least one BTC ever. On the other hand, the biggest institutional investors have been offloading. This suggests that the institutional investors agree with our analysis. </p>
<h2>Where we’re heading</h2>
<p>There are those who argue that bitcoin is a bubble and that ultimately cryptocurrencies are worthless. That’s a separate debate for another day. If we assume there is a future for blockchains, which are the online ledgers that enable cryptocurrencies, the key question is when bitcoin will reach the accumulation phase that typically ends a bear phase in any market.</p>
<p>Known as <a href="https://www.investopedia.com/articles/active-trading/070715/making-money-wyckoff-way.asp">Wyckoff accumulation</a>, this <a href="https://school.stockcharts.com/doku.php?id=market_analysis:the_wyckoff_method">is where</a> the price of the asset repeatedly tests two areas: the upper bound where traders previously sold heavily enough for the price to stop rising (known as resistance), and the lower bound where traders bought heavily enough that the price stopped going down (known as support). </p>
<p>At the point where institutional investors decide the lower bound has proved to be sufficiently resilient – in other words, they think the price is cheap at that level – they will start buying the asset again. That moment is only likely to come after there has been a capitulation. </p>
<p>Of course, history does not repeat itself exactly. It may be this is the first time that retail investors have outsmarted the large institutions, and that the only way is now up. </p>
<p>More likely, however, there is more pain on the way. With a recession on the cards, unprecedented job layoffs and weak retail data coming out of the US, it doesn’t point to the kind of optimism that tends to move markets higher. It would therefore make sense to brace yourself for another plunge in the price of bitcoin and the rest of the crypto market.</p><img src="https://counter.theconversation.com/content/198682/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Kinsella works part-time as an investment analyst for Tyndall Asset Management.</span></em></p><p class="fine-print"><em><span>Richard Fairchild does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s much excitement among bitcoiners right now – but are they about to be disappointed?James Kinsella, PhD Researcher in Finance, University of BathRichard Fairchild, Senior Lecturer in Corporate Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1853392022-06-22T13:36:33Z2022-06-22T13:36:33ZCrypto crash: market volatility is testing investor will but crypto-enthusiasts still see a future for the asset class<figure><img src="https://images.theconversation.com/files/470141/original/file-20220621-15-gj9nrl.jpg?ixlib=rb-1.1.0&rect=37%2C9%2C6193%2C4119&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Significant losses have caused a crypto market exodus, but for how long?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bitcoin-coin-on-background-smartphone-screen-2101596688">Andrey Gorgots/Shutterstock</a></span></figcaption></figure><p>Bitcoin, the original cryptocurrency, remains a bellweather for the sector. It hit an <a href="https://www.statista.com/statistics/326707/bitcoin-price-index/">all-time high</a> of more than US$68,000 (£55,600) in November 2021, when the <a href="https://www.cnbc.com/2022/06/15/bitcoin-has-lost-more-than-50percent-of-its-value-this-year-what-to-know.html">overall value</a> of the cryptocurrency market was close to US$3 trillion. In the months since, however, most major cryptocurrencies have fallen by more 70% and bitcoin itself has dropped below US$18,000. </p>
<p>Is this just another crash in the volatile cryptocurrency market, or is this the beginning of the end for this alternative asset class?</p>
<p>When bitcoin was first introduced in early 2009, it was a new type of asset. While trading was thin initially, price appreciation drove its value to nearly US$20,000 in <a href="https://www.coindesk.com/markets/2017/12/29/from-900-to-20000-bitcoins-historic-2017-price-run-revisited/">late 2017</a>. This happened as more retail investors were drawn to cryptocurrencies as a supposed <a href="https://www.sciencedirect.com/science/article/pii/S1057521918307622?casa_token=WBgIQBZKIEsAAAAA:nBaHn8TXmikh2P-fkSt1JvFJyKOW2JGhm7BO9WgppxNgc9UeaKj517cunUdUmLYvE8Jz-1qJgl-q">hedge or safe-haven</a> versus other asset classes. </p>
<p>And as the market grew, so too did the range of investment opportunities. Futures and options – financial contracts to buy or sell an asset or security at a specific price or date – are a common hedging tool used in other markets such as oil or the stock market. In December 2017, the first bitcoin futures on a regulated exchange were <a href="https://www.theguardian.com/technology/2017/dec/11/bitcoin-makes-debut-futures-market-cboe-chicago-board-options-exchange#:%7E:text=The%20first%2Dever%20bitcoin%20future,the%20Chicago%20Board%20Options%20Exchange.">listed</a> by the Chicago Board Options Exchange. Bitcoin options followed on the <a href="https://www.cmegroup.com/media-room/press-releases/2019/11/12/cme_group_announcesjan132020launchforbitcoinoptions.html">Chicago Mercantile Exchange</a> in January 2020. This period of expansion was topped by the launch of the first <a href="https://theconversation.com/bitcoin-why-its-value-has-rocketed-once-again-170396">bitcoin exchange-traded fund</a> (ETF) in October 2021, providing investors with exposure to bitcoin without having to buy it on a crypto exchange. </p>
<h2>Growing crypto acceptance</h2>
<p>At the same time, the traditional financial sector was becoming increasingly accepting of cryptocurrencies as a legitimate asset class. A <a href="https://www.fidelitydigitalassets.com/research-and-insights/fidelity-digital-assets-2021-institutional-investor-digital-assets-study">2021 study</a> of institutional investors found seven in 10 expected to buy or invest in digital assets in the future. This combination of maturity and acceptance, however, also increased the correlation between the stock market and cryptocurrencies, leading to a decline in their <a href="https://www.sciencedirect.com/science/article/pii/S1544612320304244">safe-haven</a> properties.</p>
<p>Bitcoin was <a href="https://www.sciencedirect.com/science/article/pii/S0165176518300041?casa_token=ek-p2N0GrCcAAAAA:db-abkf9sQz-sm746gCnLil9CFr__TBqcJcQtOk7pVstb5yD0K4xmZBP8bVkaRhpVEDRJonR_A">fairly disconnected</a> from traditional financial markets in its early days. But as it became “just another asset”, the sector <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612322002380">began to be affected</a> by the same macroeconomic factors that influence traditional markets. The US Federal Reserve’s decision to <a href="https://time.com/nextadvisor/banking/savings/latest-fed-rate-hike-silver-lining-for-savers/">raise interest rates</a> by 0.75% in June to combat growing inflation, the ongoing war in Ukraine, and the subsequent <a href="https://theconversation.com/oil-why-higher-prices-will-complicate-the-energy-transition-157199">rise in oil prices</a> have all acted as a drag on cryptocurrencies in recent months. Moves to <a href="https://time.com/nextadvisor/investing/cryptocurrency/biden-executive-order-crypto-expert-reaction/">regulate the sector</a> have also had an impact.</p>
<p>But it isn’t only macroeconomic factors that have caused this crypto downturn. In May and June this year, stablecoin <a href="https://theconversation.com/cryptocurrencies-why-theyve-crashed-and-what-it-could-mean-for-their-future-183048">values plummetted</a>, major cryptocurrency exchange Binance paused bitcoin withdrawals due to a <a href="https://fortune.com/2022/06/13/binance-pauses-bitcoin-withdrawals-changpeng-cz-zhao/">“stuck transaction”</a>, and lending platform Celsius Network <a href="https://www.reuters.com/technology/crypto-firm-celsius-pauses-all-transfers-withdrawals-between-accounts-2022-06-13/">froze withdrawals and transfers</a> citing “extreme” market conditions.</p>
<p>Amid this disruption, users of public blockchain platform Solana have reportedly voted to <a href="https://www.coindesk.com/tech/2022/06/19/solana-defi-platform-votes-to-control-whale-account-in-bid-to-avoid-liquidation-chaos/">temporarily take control</a> of a so-called “<a href="https://www.investopedia.com/terms/b/bitcoin-whale.asp">whale</a>” account – the platform’s largest at around US$20 million – to stop the account owner liquidating its positions and driving prices down even further. </p>
<p>Together, these factors have caused investor confidence to drain from the sector. The <a href="https://alternative.me/crypto/fear-and-greed-index/">Crypto Fear & Greed Index</a> is almost at an all-time-low of 9/100, which indicates “extreme fear”. The index was at 75/100 when bitcoin reached its November 2021 high.</p>
<h2>The crypto outlook</h2>
<p>So what does the future hold for this alternative asset class? As can only be expected in the cryptocurrency ecosystem, the range of views is extreme. Some see this market correction as a great time to “<a href="https://www.forbes.com/uk/advisor/investing/cryptocurrency/crypto-market-crash-is-it-the-right-time-to-buy-the-dip/">buy the dip</a>”. Others believe this is the <a href="https://www.wsj.com/articles/the-crypto-party-is-over-11655524807">end of the party</a> for cryptocurrencies.</p>
<p>Resolute bitcoiners can always find positive signs in the market and many use on-chain metrics (trading signals based on data gleaned from public blockchain transactions) to determine good times to buy. Recently, popular metrics including market value to realised value (MVRV – a ratio showing current versus average coin prices) <a href="https://cointelegraph.com/news/bitcoin-critics-say-btc-price-is-going-to-0-this-time-but-these-3-signals-suggest-otherwise">suggest</a> bitcoin is about to start an accumulation period based on past history. On the other hand, this may be an indication of confirmation bias as investors search for signals that confirm their beliefs.</p>
<p>Others argue this is just one more instance in a long line of <a href="https://www.sciencedirect.com/science/article/pii/S1544612317307419">bursting cryptocurrency bubbles</a> – a typical crypto market cycle. Comparisons with the <a href="https://www.cnbc.com/video/2022/06/13/bitcoin-crashes-15percent-celsius-halts-withdrawals-and-cryptos-dot-com-bubble-cnbc-crypto-world.html">dotcom crash</a> of 2000 have been rife in the market, but crypto enthusiasts argue the basic premise of dotcom stocks was correct – in that the internet <em>was</em> the future. They believe the same is true of <a href="https://www.forbes.com/sites/davidbirch/2022/06/19/if-the-crypto-crash-is-another-tulip-bubble-that-is-really-good-news/?sh=34d70a6951f1">bitcoin</a>, predicting that the sector will recover. </p>
<p>Economists have <a href="https://books.google.ie/books?hl=en&lr=&id=muI3AQAAMAAJ&oi=fnd&pg=PA13&dq=extraordinary+popular+delusions&ots=XrXWcBF8Pu&sig=Vg_YVS_p3WuLqXx4_SUk3F0mgjo&redir_esc=y#v=onepage&q=extraordinary%20popular%20delusions&f=false">studied bubbles for centuries</a>, however, and evidence shows many assets never recover nominal price highs after the market bubble bursts. Some of these economists, including former US secretary of labor Robert Reich, <a href="https://www.theguardian.com/technology/commentisfree/2022/jun/19/the-crypto-crash-all-ponzi-schemes-topple-eventually">have equated</a> cryptocurrencies to <a href="https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme">Ponzi schemes</a> that, unless regulated, will go the way of all such schemes and eventually collapse. </p>
<p>Certainly, the vision of cryptocurrencies as a decentralised asset available on a peer-to-peer network with no barriers to entry goes against recent actions such as the freezing of withdrawals by some platforms. These moves will not go down well with crypto-enthusiasts. Further, the increased correlation of cryptocurrencies to other asset classes is diminishing their value as a diversification tool, while growing interest in <a href="https://www.sciencedirect.com/science/article/pii/S0040162522002414">Central Bank Digital Currencies</a> threatens to further erode crypto’s attractiveness to its core investors. </p>
<p>Cryptocurrencies also face <a href="https://www.nature.com/articles/d41586-022-00927-5">challenges</a> around <a href="https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:%7E:text=But%20crypto%20has%20a%20dirty,of%20Argentina%2C%20population%2045%20million.">energy use</a>, privacy and <a href="https://online.maryville.edu/blog/blockchain-and-bitcoin-cyber-security-risks/">security</a>. It is not clear if these issues can be solved without eroding the elements that made cryptocurrencies popular in the first place. The recent US launch of a <a href="https://www.cnbc.com/2022/06/18/bitcoin-price-drops-below-18600-as-sell-off-accelerates.html">short Bitcoin ETF</a>, which enables investors to gain from declines in the bitcoin price, will allow investors to hedge their positions and trade against bitcoin.</p>
<p>Investing in cryptocurrencies is like riding a rollercoaster with large appreciations followed by sudden dips. Volatility is endemic, bubbles and crashes are commonplace, and there are divisive opinions on environmental, ethical and social benefits. The major correction in this market has tested the will of even the most avid crypto-enthusiast. Buckle up because this story is not over yet.</p><img src="https://counter.theconversation.com/content/185339/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies.</span></em></p><p class="fine-print"><em><span>Brian Lucey holds approx €5 worth of cryptocurrencies. It used to be more....</span></em></p>Are we witnessing the beginning of the end for crypto or is this just another crash in a volatile market?Andrew Urquhart, Professor of Finance & Financial Technology, ICMA Centre, Henley Business School, University of ReadingBrian Lucey, Professor of International Finance and Commodities, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1713872021-11-10T19:07:38Z2021-11-10T19:07:38ZWhat is Bitcoin’s fundamental value? That’s a good question<figure><img src="https://images.theconversation.com/files/431237/original/file-20211110-23-1yw4oyj.jpg?ixlib=rb-1.1.0&rect=49%2C532%2C5476%2C2754&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Salvador Melendez/AP</span></span></figcaption></figure><p>As it hits new highs, there is no shortage of bold predictions about Bitcoin <a href="https://www.forbes.com/sites/billybambrough/2021/11/02/crypto-price-prediction-bitcoin-could-hit-100000-before-the-end-of-2021-but-lacks-ethereum-intensity/?sh=392b38e96b7d">reaching US$100,000</a> or more. </p>
<p>Often these are based on not much more than extrapolations by people with vested interests: the price has gone up a lot so it will keep going up. If it gets above its previous high, it must keep going up. </p>
<p>There is also “charting” or “technical analysis” – looking at graphs and seeing patterns in them. There may be fancy terms such as “<a href="https://cointelegraph.com/news/analysts-expect-parabolic-bitcoin-price-move-after-the-last-resistance-at-67k-falls">resistance levels</a>” and “<a href="https://www.investopedia.com/terms/t/tenkansen.asp#:%7E:text=Tenkan-sen%2C%20or%20conversion%20line%2C%20crates%20a%20moving%20average,information%20in%20a%20single%20view%20for%20technical%20analysts.">Tenkan-Sen</a>”. There is talk about “<a href="https://seekingalpha.com/article/4459569-bitcoin-fundamentals-and-technicals-tell-the-same-story">fundamentals</a>”.</p>
<p>Let’s examine this last idea. Does Bitcoin have a fundamental value?</p>
<h2>Calculating fundamental values</h2>
<p>A fundamental value in traditional financial-speak means a value based on what return (or cash flow) is generated by an asset. Think of an apple tree. To an investor its fundamental value is in the apples it produces.</p>
<p>In the case of company shares, the fundamental value is the dividend paid from profits. A standard measure used by investors is the price-to-earnings ratio. In property, the fundamental value reflects the rent the investor earns (or the owner-occupier saves). For a bond, the value depends on the interest it pays. </p>
<p>Gold has a fundamental value also, based on its use for jewellery or dental fillings or in electronics. But this value is not why most people buy gold.</p>
<h2>Fundamentals for cryptocurrencies</h2>
<p>National currencies are different. Their value is in being a trusted and accepted unit of exchange. </p>
<p>In the past coins made with gold and silver had a fundamental value because they could be melted down for their precious metals. That’s no longer the case with fiat currencies, whose value depends solely on people trusting that others accept them at face value.</p>
<p>Most cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin are essentially private <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3888752">fiat currencies</a>. They have no corresponding assets or returns. This makes it hard to determine a fundamental value. </p>
<p>In September analysts with Britain’s Standard Chartered Bank <a href="https://www.nasdaq.com/articles/%24789-billion-standard-chartered-sees-bitcoin-hitting-%24100000-by-early-next-year-2021-09-08">argued</a> Bitcoin could peak at about US$100,000 by the end of 2021. “As a medium of exchange, Bitcoin may become the dominant peer-to-peer payment method for the global unbanked in a future cashless world,” said the head of the bank’s crypto research team, Geoffrey Kendrick (a former Australian Treasury official).</p>
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Read more:
<a href="https://theconversation.com/what-is-an-etf-and-why-is-it-driving-bitcoin-back-to-record-high-prices-170095">What is an ETF? And why is it driving Bitcoin back to record high prices?</a>
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<p>Theoretically this could be possible. Globally an estimated <a href="https://www.brinknews.com/bridging-the-digital-divide-to-widen-financial-services-in-central-asia/">1.7 billion people</a> lack access to banking services. But Bitcoin has been spruiked as the future of payments since its invention in 2008. It has made little progress. </p>
<p>There are at least two significant barriers. First is the computational grunt needed to process payments. Technology may overcome this. The second obstacle is harder: the volatility of its price. </p>
<p>Digital currencies that can maintain a stable value are more likely to become payment instruments. These include the existing stablecoins, <a href="https://www.reuters.com/technology/facebook-backed-crypto-project-diem-launch-us-stablecoin-major-shift-2021-05-12/">Meta’s mooted Diem</a> and <a href="https://www.bis.org/publ/work976.pdf">central bank digital currencies</a>, already <a href="https://www.sanddollar.bs/">operational</a> in some Caribbean economies. </p>
<p>So far the only significant company to have accepted payments in Bitcoin is Tesla, which announced this policy in March only to reverse <a href="https://www.bbc.com/news/business-57096305">it in May</a>. </p>
<p>The only country to adopt Bitcoin as an approved currency is El Salvador (which also uses the US dollar). But it is far from clear what benefits there are. The laws forcing businesses to accept the cryptocurrency have also led to protests. </p>
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Read more:
<a href="https://theconversation.com/can-bitcoin-be-a-real-currency-whats-wrong-with-el-salvadors-plan-162348">Can Bitcoin be a real currency? What's wrong with El Salvador's plan</a>
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<h2>Bitcoin as digital gold</h2>
<p>If Bitcoin has no real value as a widespread means of payment, what about as a store of value, like digital gold? It does have this advantage over most of the “altcoins”. Its supply, like gold, is (arguably) limited. </p>
<p>One tool used by crypto enthusiasts to compare Bitcoin’s scarcity with gold is called the <a href="https://www.cointree.com/learn/bitcoins-stock-to-flow-model/">“stock-to-flow” model</a>. This approach claims gold holds its value because the existing stock of gold is 60 times more than the amount of new gold mined each year. The stock of Bitcoin is more than 50 times than the new coins “mined” annually. </p>
<p>But this does not explain why Bitcoin’s price halved earlier this year. Nor does it have any theoretical basis in economics: prices don’t depend just on supply.</p>
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Read more:
<a href="https://theconversation.com/in-gold-we-trust-why-bullion-is-still-a-safe-haven-in-times-of-crisis-144567">In gold we trust: why bullion is still a safe haven in times of crisis</a>
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<p>Some <a href="https://markets.businessinsider.com/news/currencies/cathie-wood-bitcoin-price-prediction-jump-500000-ether-confidence-high-2021-9">Bitcoin promoters</a> predict higher prices on the assumption funds managers will eventually invest an abritrary proportion, say 5%, of their funds in Bitcoin. </p>
<p>But such predictions implicitly assume Bitcoin, as the largest and best-known cryptocurrency, will continue to maintain its dominant position in the crypto market. This is not guaranteed. And there is no limit to the number of cryptocurrency alternatives.</p>
<p>Remember Bankcard? This credit card company once had 90% of the Australian market in the early 1980s. It was defunct by 2006. What about MySpace? Before 2008 it was a bigger social networking site than Facebook. </p>
<h2>Here we go again</h2>
<p>In September <a href="https://www.economist.com/leaders/2021/09/18/the-beguiling-promise-of-decentralised-finance">The Economist</a> argued Bitcoin “is now a distraction” to the future of decentralised finance, with rival blockchain cryptocurrency Ethereum “reaching critical mass”.</p>
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Read more:
<a href="https://theconversation.com/ethereum-the-transformation-that-could-see-it-overtake-bitcoin-170316">Ethereum: the transformation that could see it overtake bitcoin</a>
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<p>There are parallels between the Bitcoin bubble and the dotcom bubble of 2000, driven by overly optimistic assumptions about new technologies – and human greed.</p>
<p>Just as a few stars such as Amazon emerged from the wreckage of the dot.com bubble, so it is possible some applications of the block-chain technology underlying Bitcoin have enduring utility. But I doubt Bitcoin will be one of them.</p><img src="https://counter.theconversation.com/content/171387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins formerly worked in two central banks and for the Bank for International Settlements. This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>Like fiat currencies, cryptocurrencies have no fundamental value. So what is the value of Bitcoin?John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1541542021-02-04T13:13:38Z2021-02-04T13:13:38ZWall Street isn’t just a casino where traders can bet on GameStop and other stocks – it’s essential to keeping capitalism from crashing<figure><img src="https://images.theconversation.com/files/382356/original/file-20210203-17-l8h3t9.jpg?ixlib=rb-1.1.0&rect=56%2C156%2C2831%2C2271&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Traders on the floor of the New York Stock Exchange in 1955.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/NewYorkStockExchange1955/10406bc6b6a94ba681a2fa65c883fbf8/photo?Query=trading%20AND%20floor&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=5287&currentItemNo=31">AP Photo</a></span></figcaption></figure><p><a href="https://theconversation.com/why-gamestop-shares-stopped-trading-5-questions-answered-154255">Shares of GameStop</a> and other companies or <a href="https://www.kitco.com/charts/livesilver.html">assets that shot up</a> in value in recent weeks are now <a href="https://finance.yahoo.com/quote/GME/">dropping</a> <a href="https://www.washingtonpost.com/technology/2021/02/02/gamestop-stock-plunge-losers/">like stones</a>. While I feel sorry for the many investors who will likely lose a lot of money, the stocks’ return to Earth is actually a good thing – if you want to avoid financial meltdown to the long list of crises the U.S. is facing. </p>
<p>The reason has to do with what financial markets are – and what they are not – as well as what happens when prices of stocks and other securities become untethered from the fundamental value of the assets they’re meant to represent. </p>
<p>As a finance professor who does <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en">research on how markets respond to new information</a>, I believe it is important to maintain a close link between security prices and fundamentals. When that stops happening, a market collapse may be not far behind. </p>
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<img alt="Sillouettes of faces can be seen against slot machines and other gambling devices" src="https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=465&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=465&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382359/original/file-20210203-23-127o48d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=465&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Although investors such as hedge funds engage in speculation, Wall Street isn’t meant to be like a casino.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/MassachusettsGamblingWynn/0e0c68a0a3d64eac81bcaedc155c64b2/photo?Query=casino%20AND%20floor&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=387&currentItemNo=45">AP Photo/Charles Krupa</a></span>
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<h2>Capital markets aren’t casinos</h2>
<p><a href="https://www.nbcchicago.com/lx/gamestop-short-squeeze-wall-streets-david-and-goliath-story-explained-by-an-expert/2423671/">Some have portrayed</a> GameStop as a David vs. Goliath story. According to that narrative, the big guys on Wall Street have been getting rich gambling on the stock market for years. What’s the problem when the little guy gets a chance? </p>
<p>The first thing to keep in mind is that markets aren’t a big casino, <a href="https://www.tradersmagazine.com/departments/equities/the-stock-market-is-now-a-casino/">as some seem to believe</a>. Their core purpose is to efficiently connect investors with companies and other organizations that will make the most productive use of their cash. </p>
<p>Accurate market prices, meant to reflect a company’s expected profits and overall risk level, provide an important signal to investors whether they should hand over their money and what they should get in return. Companies like Apple and Amazon simply would not exist as we know them today without <a href="https://www.stlouisfed.org/education/tools-for-enhancing-the-stock-market-game-invest-it-forward/episode-1-understanding-capital-markets">access to capital markets</a>.</p>
<p>The more jaundiced view of markets focuses on episodes when <a href="https://ssrn.com/abstract=268311">markets seemingly go crazy</a> and on the <a href="https://ssrn.com/abstract=1622184">speculative gambling behavior of some traders</a>, such as <a href="https://hbswk.hbs.edu/item/the-problem-with-hedge-funds">hedge funds</a>. The GameStop saga feeds into this storyline.</p>
<p>But GameStop also illustrates what happens when stock prices don’t reflect reality.</p>
<h2>The GameStop bubble</h2>
<p>GameStop fundamentals <a href="https://news.gamestop.com/static-files/9d2139e1-31c7-498f-ad95-63db1e6d085a">are, to put it mildly, lackluster</a>.</p>
<p>The company is a brick-and-mortar chain of video game stores. Most video game sales now <a href="https://screenrant.com/digital-game-sales-consoles-outnumber-physical-first-time/">take place as digital downloads</a>. GameStop <a href="https://www.washingtonpost.com/business/2021/02/01/gamestop-retail-stores/">has been slow</a> to adapt to this new reality. Its revenue peaked in <a href="https://news.gamestop.com/static-files/8ddaae13-8fcc-4ea1-9ac6-0ea74d0d9d7c">2012 at US$9.55 billion</a> and had dropped by a third <a href="https://news.gamestop.com/static-files/9d2139e1-31c7-498f-ad95-63db1e6d085a">as of 2019</a>. It hasn’t earned a profit since 2017. Put simply, it is a money-losing company in a competitive and quickly changing industry. </p>
<p>The recent speculative frenzy, however, increased the GameStop stock price <a href="https://finance.yahoo.com/quote/GME/">from under $20 in early January to as high as $483</a> in a little over two weeks, <a href="https://www.wsj.com/articles/gamestop-stock-short-squeeze-ugly-side-11611750250">driven by retail investors on Reddit</a> who coordinated their buying to harm hedge funds – <a href="https://www.wsj.com/articles/gamestop-mania-reveals-power-shift-on-wall-streetand-the-pros-are-reeling-11611774663?mod=livecoverage_web">costing the professionals billions of dollars</a>. </p>
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<p>It is <a href="https://marker.medium.com/gamestop-proves-were-in-a-meme-stock-bubble-b3f39163a77f">clearly a speculative price bubble</a> and has some characteristics of a Ponzi scheme. Many small investors who “get on the train” late and buy at the inflated prices – especially <a href="https://ssrn.com/abstract=1151595">those attracted by the extreme price moves</a> and media coverage – will be left holding the bag.</p>
<p>And sooner or later, the stock price will likely come back to Earth to a level that can be supported by the fundamentals of the company. Shares <a href="https://www.marketwatch.com/investing/stock/gme">closed on Feb. 4 at $53.50</a>, the lowest since Jan. 21. </p>
<p>The problems begin when that doesn’t happen until too late.</p>
<h2>Bubbles are made to pop</h2>
<p>Financial markets are made up of people. People are imperfect, and so are markets. This means market prices are not always “right” – and it’s often hard to know what the “right” price is. </p>
<p>That is true when it comes to the price bubbles in individual stocks like GameStop. But it’s also true on a much bigger scale, when it comes to a market as a whole. </p>
<p>Price bubbles and crashes are good for neither Wall Street nor Main Street. When the dot-com bubble popped in 2000 – <a href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">after prices of dozens of tech stocks soared exponentially in the late 1990s</a> – an <a href="https://time.com/3741681/2000-dotcom-stock-bust">economic recession</a> followed soon after. The bursting of a <a href="https://www.investopedia.com/terms/h/housing_bubble.asp">housing bubble in 2008</a> <a href="https://www.history.com/topics/21st-century/recession">triggered a global financial crisis and the Great Recession</a>.</p>
<figure class="align-center ">
<img alt="A boys makes a large soap bubble." src="https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382360/original/file-20210203-21-1tp1sm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The bigger the bubble, the bigger the ‘pop.’</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/young-boy-blows-large-soap-bubble-royalty-free-image/114931642">Robin Knight/Moment via Getty Images</a></span>
</figcaption>
</figure>
<h2>Too much momentum</h2>
<p>So markets fail sometimes, and we need sensible regulation and enforcement to make such failures less likely. </p>
<p>Taken in isolation, the GameStop craze is unlikely to trigger a disruption to the overall stock market, especially if its price continues to fall more in line with the company’s fundamental value. Unfortunately, this was not an isolated case. Nor was GameStop the first sign of problems. </p>
<p>In recent days, Reddit users have also driven up the <a href="https://www.cnbc.com/2021/02/02/is-silver-the-next-gamestop.html">prices of silver</a> and <a href="https://www.washingtonpost.com/business/2021/01/28/gamestop-stocks-reddit/">companies</a> such as BlackBerry and movie theater giant AMC Entertainment. Popular trading apps like Robinhood <a href="https://www.wsj.com/articles/when-the-stock-market-is-too-much-fun-11607705516">have made trading easy, fun</a> and basically free.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>The share price of Tesla, for example, <a href="https://finance.yahoo.com/quote/TSLA/">skyrocketed 720% last year</a>, in large part when investors bought the stock because it was already rising. This is called <a href="https://www.wsj.com/articles/day-trader-mania-will-challenge-sec-under-gensler-bidens-choice-for-chairman-11611961219/">momentum investing</a>, a trading strategy in which investors buy securities because they are going up – selling them only when they think the price has peaked. </p>
<p>If this continues, it will likely lead to more financial bubbles and crashes that could make it harder for companies to raise capital, posing a threat to the <a href="https://www.politico.com/news/2021/01/27/fed-us-economic-recovery-weakening-463190">already limping U.S. economic recovery</a>. Even if the worst doesn’t happen, large price movements and allegations of price manipulation <a href="https://www.politico.com/news/2021/01/29/wall-street-washington-crackdown-gamestop-463935">could hurt public confidence</a> in financial markets, which would make people more reluctant to invest in retirement and other programs.</p>
<p>Warren Buffett <a href="https://markets.businessinsider.com/news/stocks/warren-buffett-21-best-quotes-2019-2-1027944381">once said</a> about stock market behavior: “The light can at any time go from green to red without pausing at yellow.” </p>
<p>What he meant was that markets can turn on a dime and plunge. He saw these moments as opportunities to find deals in the market, but for most people they result in panic, heavy losses and economic consequences like mass unemployment – as we saw in 1929, 2000 and 2008. </p>
<p>There’s no particular reason it won’t happen again.</p><img src="https://counter.theconversation.com/content/154154/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Market prices are supposed to reflect a company’s fundamental value. When they no longer do, bad things can happen.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1172922019-05-20T14:17:30Z2019-05-20T14:17:30ZOverpriced tech IPOs sell grand visions but aren’t worth their valuations<figure><img src="https://images.theconversation.com/files/275412/original/file-20190520-69209-40d1r1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">rblfmr / Shutterstock.com</span></span></figcaption></figure><p>The year of the tech IPO is 2019. Uber went public on May 10 with a <a href="https://www.nytimes.com/2019/05/09/technology/uber-ipo-stock-price.html">US$82.4 billion valuation</a>. Fellow ride-sharing app Lyft floated in March with a <a href="https://www.businessinsider.com/lyft-stock-how-valuation-compares-to-other-tech-names-at-ipo-2019-4">U$24 billion valuation</a> and Pinterest had a <a href="https://www.businessinsider.com/pinterest-prices-ipo-2019-4">US$10 billion IPO in April</a>. More big names – including Slack, Airbnb, WeWork and Palantir – are set to follow. </p>
<p>But Uber’s share price began to slide <a href="https://www.telegraph.co.uk/technology/2019/05/20/has-ubers-botched-public-listing-turned-investors-sour/">as soon as it went public</a>. Lyft’s shares have also been <a href="https://markets.businessinsider.com/news/stocks/lyft-stock-price-post-ipo-uber-debut-disappoints-2019-5-1028195575">on a downward trajectory since March</a>. So it’s worth considering how astronomic valuations for these non-profitable companies are calculated. Is there any science or rationale upon which to base the values, or are they purely hype on the part of those standing to benefit most? This would include early investors, the board and investment bank advisers promoting the offers.</p>
<p>In reality, there is surprisingly little evidence supporting IPO valuations. It is almost impossible to establish a relationship between the underlying data and the valuation. The main influences are clear: a resonant company vision and rapid user growth. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=395&fit=crop&dpr=1 754w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=395&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=395&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Lyft’s share price has been falling since its IPO at the end of March 2019.</span>
<span class="attribution"><a class="source" href="https://finance.yahoo.com/chart/LYFT#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%3D">Yahoo! Finance</a></span>
</figcaption>
</figure>
<h2>Vision and growth</h2>
<p>A company’s vision normally sketches out how its future is going to be different to its competitors and how this will benefit the business (and shareholders). Uber and Lyft, for example, suggest that urban dwellers will not need to own a car, with access to their hassle-free vehicles. Somehow the <a href="https://mashable.com/article/lyft-ipo-self-driving-cars-investors/">introduction of autonomous vehicles</a> will also benefit the taxi hailing businesses. </p>
<p>The end of car ownership could be some way off and predicting the future over such a long time period is fraught with risk. The real vision for most technology platforms is to emulate Facebook, Amazon or Google and create <a href="https://en.wikipedia.org/wiki/Network_effect">network effects</a>, which is the phenomenon where the more customers you get, the more useful the product or service becomes, attracting more suppliers which in turn attracts more customers. </p>
<p>As for user growth, this may be measured in different ways – such as people signing up to the product or service and active, return customers. Growth trajectory is important. User growth forecasts are made, which do have some relationship to the valuation at IPO and beyond. </p>
<p>The focus on user growth, however, often fails to account for a business model’s switching costs. Businesses with low switching costs can gain users rapidly through low pricing, but lose them to someone else equally rapidly with the offer of a better proposition. </p>
<p>So take taxi ride hailing. Uber has <a href="https://www.forbes.com/sites/debtwire/2018/10/12/uber-says-its-three-years-from-turning-a-profit-as-it-pitches-debut-bond/#40c8ef3b5e0e">burnt billions of cash every year</a> by subsidising driver pay and offering customers cheap fares. At some stage investors will tire of funding this so prices will need to go up and driver incentives will need to be withdrawn. Both customers and drivers may then choose to go elsewhere. </p>
<p>Uber drivers on strike in the run-up to the IPO was a timely reminder of Uber’s precarious relationship with one half of its network, as well as providing <a href="https://www.theverge.com/2019/5/8/18537194/uber-driver-strike-ipo-public-relations-nyc">poor PR ahead of its IPO</a>. Uber’s growth slowed rapidly in 2018. In turn, cash burn increased as it attempted to maintain the critical user growth trajectory ahead of its IPO. </p>
<p>Meanwhile, competition remains strong, with traditional taxi firms increasingly developing their own apps, with no proprietary technology involved. So it begs the question: can the ride hailing tech company pay off, if profits are still yet to be made?</p>
<h2>Pay attention to cash burn</h2>
<p>The current rush of tech IPOs at early stages of their development is likely related to fears of investor fatigue setting in, particularly if companies keep falling below their initial price. Plus, there are signs that interest rates are on the rise, which will reduce the amount of money investors are willing to spend on IPO investments.</p>
<p>Following the dot com crash of 2000, the rate of cash burn should be taken as a warning sign to investors. The vast majority of venture capital-funded tech start ups collapsed as investors lost confidence <a href="https://theconversation.com/why-stock-markets-crash-lessons-from-recent-history-91409">in their ability to ever make profits</a>. Indeed the current batch of technology startup IPOs are taking place at a much earlier stage of company development than previous IPOs. As a consequence, they are much further from eventual profitability and cash generation than earlier IPOs. Uber lost US$3 billion in operating profit in 2018 <a href="https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm#toc647752_9">according to its IPO filing</a>, while Lyft <a href="https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm">lost US$900m</a> and both admit to being some distance from making a profit. </p>
<p>The key issue for investors is whether IPOs allow new investors to make a return through the share price going up. If they are initially priced too high – <a href="https://www.cnbc.com/2019/01/16/snap-has-lost-more-than-20-billion-in-value-since-its-ipo.html">like Snap Inc in 2017</a> and, more recently, Lyft – then new investors are looking at losses. Snap is <a href="https://www.cnbc.com/quotes/?symbol=SNAP">down 32%</a> on its IPO while Lyft is <a href="https://finance.yahoo.com/quote/lyft?ltr=1">down 25%</a>. </p>
<p>Ultimately it is possible that both Uber, Lyft and other tech companies are worth very little. They are not yet profitable and there is little concrete evidence that they have any long-term value. Diminishing user growth, while spending huge amounts to try and mitigate their losses is a cause for concern. Valuations are almost entirely speculative and supported by little more than the trajectory of sales and user growth, funded by an enormous cash burn. In short, many of the tech IPOs of 2019 are about finding someone to buy the investment based on the promise of a grand vision, with few financial fundamentals to back it up.</p><img src="https://counter.theconversation.com/content/117292/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Astronomic valuations for non-profitable companies are popular in Silicon Valley but how are they calculated and what do they reflect?John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/874932017-12-19T01:41:39Z2017-12-19T01:41:39ZMarket bubbles and sonic attacks: Mass hysterias will never go away<figure><img src="https://images.theconversation.com/files/199472/original/file-20171215-17863-mpj8c0.jpg?ixlib=rb-1.1.0&rect=1738%2C0%2C6202%2C4737&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Were U.S. diplomats at the embassy in Cuba stricken by a mass delusion?</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Cuba-Sonic-Attacks/be7ba705400847398b024df1ef81bea9/4/0">AP Photo/Ramon Espinosa</a></span></figcaption></figure><p>Ancient and quaint seem the days of <a href="https://books.google.com/books?id=FfUcvgAACAAJ&dq=Extraordinary+Popular+Delusions+and+the+Madness+of+Crowds&hl=en&sa=X&ved=0ahUKEwjezcXZqPPXAhWlzIMKHXPHA8EQ6AEIKDAA">witch crazes, demon scares and tulip manias</a>. <a href="https://www.csicop.org/si/show/mass_delusions_and_hysterias_highlights_from_the_past_millennium">Instances of mass hysteria</a> may strike you as rare events in modern advanced societies. But such outbreaks are products of their times. They’re still around today, just in different guises. </p>
<p>Aided and abetted by its status as an internet meme, the <a href="https://www.snopes.com/slenderman/">myth of an evil, supernatural Slenderman</a> has been <a href="https://theconversation.com/beware-the-slenderman-how-users-created-the-boogieman-of-the-internet-71338">panicking adolescents</a> since 2009, even culminating in an attempted murder by proxy. If it’s easy to brush this off as a case of impressionable teens with too much internet access, then what of otherwise rational late 20th-century <a href="https://youtu.be/gVJJijESlko">American adults participating</a> in <a href="http://www.heavensgate.com">suicide cults</a>, Puerto Rico’s mythical cattle-killing <a href="http://www.animalplanet.com/tv-shows/lost-tapes/creatures/chupacabra-history/">Chupacabra monster</a>, the “<a href="https://press.princeton.edu/titles/10421.html">irrational exuberance</a>” of the dot-com bubble in the 1990s, or the seemingly insane rush to make <a href="https://www.thisamericanlife.org/radio-archives/episode/355/transcript">bad real estate investments</a> in the latter 2000s? </p>
<p>A diplomatic dustup between the U.S. and Cuba may be the latest well-publicized case of collective delusion. In 2017, the U.S. State Department claimed its diplomats in Havana were subjected to “<a href="https://www.propublica.org/article/diplomats-in-cuba">sonic attacks</a>” that produced a range of physical symptoms including hearing loss, headaches and dizziness. Consequently, the federal government <a href="https://www.state.gov/r/pa/prs/ps/2017/09/274518.htm">pulled out most of its embassy staff</a> and sent packing most Cuban diplomats stationed in the U.S. </p>
<p>Although medical exams have <a href="https://www.nbcnews.com/news/us-news/doctors-identify-brain-abnormalities-u-s-embassy-victims-cuba-attack-n826996">identified unusual physical conditions</a> in some diplomats, those exams lacked proper experimental controls and fall well <a href="https://www.theguardian.com/world/2017/oct/12/cuba-mass-hysteria-sonic-attacks-neurologists">short of providing evidence</a> for any sort of sonic attack. There remains no demonstrably valid evidence that diplomats were subjected to sonic attacks at the American embassy in Havana – and a good deal of evidence has now been amassed suggestive of the contrary. The latest culprit to be fingered is the <a href="https://www.vanityfair.com/news/2019/01/the-real-story-behind-the-havana-embassy-mystery">chirping of crickets or cicadas</a> – in conjunction with mass hysteria.</p>
<p>So how do otherwise logical and informed 21st-century people fall under the spell of these mass delusions? Over the past several decades, psychologists and sociologists have used examples like these to dig into when and how this kind of false belief gains traction.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199296/original/file-20171214-27555-13p9e4c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">One of the most famous mass delusions in America led to the Salem witch trials in 17th-century Massachusetts.</span>
<span class="attribution"><a class="source" href="http://www.loc.gov/pictures/item/2003677961/">Joseph E. Baker, Library of Congress Prints and Photographs Division</a></span>
</figcaption>
</figure>
<h2>A recipe for collective delusion</h2>
<p>Collective delusions are the culprits behind mass hysterias and related phenomena. As traditionally defined, <a href="https://mcfarlandbooks.com/product/little-green-men-meowing-nuns-and-head-hunting-panics/">they’re characterized</a> by a rapid, spontaneous and temporary spread of false beliefs within a circumscribed population.</p>
<p>Nowadays that circumscribed population can be a virtual one, bounded only by cyberconnections to a shared source of misinformation. The recent upsurge in vocal flat-Earth proponents, for example, is not the result of geographical neighbors whipping each other into a near frenzy. <a href="https://theconversation.com/how-social-media-fires-peoples-passions-and-builds-extremist-divisions-86909">Social media makes it easy</a> to find like-minded others, serve distorted information to the curious, and stir up excitement about events such as the 2017 eclipse, celebrity endorsements, and <a href="https://theconversation.com/you-dont-need-to-build-a-rocket-to-prove-the-earth-isnt-flat-heres-the-simple-science-88106">a proposed rocket launch by a flat-Earth proponent</a> intended to prove once and for all that we are all living on a disc.</p>
<p>Collective delusions emerge under a combination of several conditions. Each of these precursors is straightforward enough, but it’s harder to foresee when they might occur in concert. In turn, this makes predicting delusional outbreaks a very inexact science.</p>
<p>The most obvious precursor is the presence of multiple people who are sufficiently connected so as to share information or experiences. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=879&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=879&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=879&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1105&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1105&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199473/original/file-20171215-17889-jwk6gq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1105&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In 1978, Rev. Jim Jones orchestrated a ritual of mass murder and suicide of his followers, isolated in Jonestown, Guyana.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Jonestown-Remains/7ac740d31fe246208412db8b9f757208/96/0">AP Photo/File</a></span>
</figcaption>
</figure>
<p>Second, just as an isolated individual may develop some beliefs and behaviors that depart from prevailing norms, collective delusions and responses are more likely to occur in relatively insular groups or networks. </p>
<p>Third, a collective delusion is more likely to take hold if the group is undergoing some kind of distress. This could be rising unemployment, political destabilization or an enemy’s threats of warfare. On a smaller scale, a town may lose a crucial employer, or a fire-and-brimstone minister can instigate a satanic panic with rumors of baby-killing cults. </p>
<p>And fourth, the stressors are potent enough to trigger, in at least some individuals, either a <a href="http://www.telegraph.co.uk/news/health/11635758/Psychosomatic-disorders-When-illness-really-is-all-in-the-mind.html">psychosomatic response</a> or <a href="https://www.psychologytoday.com/blog/hide-and-seek/201312/the-psychology-scapegoating">scapegoating behavior</a>. Psychosomatic reactions – physical symptoms with psychological causes – may be as mild as itching or as severe as blindness. Scapegoating involves blaming a group of innocent (or possibly nonexistent) others for causing problems – psychosomatic or otherwise. </p>
<p>When conditions are ripe, this catalyzing subset of group members <a href="https://books.google.com/books?hl=en&lr=&id=WVNrDys7cyIC&oi=fnd&pg=PA163&dq=Imitation+as+entrainment+Brain+mechanisms+and+social+consequences&ots=aeSUUGQfAl&sig=anvDTaHKs6fEdQwIhK0j5N6QEhw#v=onepage&q=Imitation%20as%20entrainment%20Brain%20mechanisms%20and%20social%20consequences&f=false">sets off a chain reaction</a>. They begin to seek and identify external causes for their distress, or sources for its relief. Psychosomatic responses spread; contempt for the scapegoats grows. People become hypervigilant and toss critical thinking out the window, looking for and finding imagined threats. Conspiracy theories are spawned, angels and demons invoked, fears stoked, panic induced. The supernatural may start to seem natural.</p>
<p>As more and more group members become ensnared in a positive feedback loop, the perceived threat is legitimized, only broadening and deepening social distress further. Because they are inherently newsworthy, mass delusions are picked up by mass media, which <a href="https://www.thehistorypress.co.uk/publication/panic-attacks/9780750937856/">fan the flames</a> even more.</p>
<p>In these ways, a nonexistent threat can set off a self-sustaining cascade of irrationality that lasts until the perceived threat recedes.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/199306/original/file-20171214-27597-khjcfn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Will they look back and wonder what they were thinking?</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Visual_kei_1.jpg">Jacob Ehnmark</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Delusion everywhere, to different degrees?</h2>
<p>While descriptions of mass hysterias make great reading, they represent only the far end of a continuum of what sociologists like me call social diffusion processes. For the most part, these are quite mundane – you might recognize a few from your own daily life. While around the world stock market bubbles and bank runs make news, less frenetic responses to perceived threats and conspiracies abound: the <a href="https://www.csicop.org/si/show/the_9_11_truth_movement_the_top_conspiracy_theory_a_decade_later">9/11 “truthers</a>,” the recent uptick in <a href="https://www.theflatearthsociety.org/home/">flat-Earth beliefs</a>, <a href="https://www.prevention.com/eatclean/read-this-if-youre-still-afraid-of-eating-gluten">fears of gluten</a> and <a href="https://www.csicop.org/si/show/no_health_risks_from_gmos">genetically modified foods</a>, <a href="https://www.skeptic.com/insight/signs-of-hope-and-despair-on-climate-change/">climate change deniers</a>, <a href="https://www.skeptic.com/magazine/archives/22.4/">wars on science</a> on some liberal college campuses, and more. Even the <a href="https://www.amazon.com/Fear-Fashion-Critical-Cases-Anxiety/dp/9198038885">desire to be fashionable</a> can be seen as a response to the fear of being excluded. </p>
<p><a href="https://doi.org/10.1146/annurev.soc.24.1.265">Simple mathematical equations</a> can quite elegantly describe the speed, duration and extensiveness of the spread of beliefs and behaviors. A typical “diffusion model” shows how the penetration through a population of such things as beliefs, behaviors, illnesses, innovations or products is determined by just a few parameters. These typically include the group’s size, the density of its members’ interconnections and the inherent contagiousness of the thing being spread.</p>
<p>Irrational beliefs, and the often ill-considered responses they engender, can spread like an infection across groups as large as nations or as small as nuclear families. Sunshine, as they say, is the best disinfectant. <a href="https://doi.org/10.1037/0003-066X.36.4.343">Social impact theory</a> would suggest that the best approach to administering social disinfectant is via large numbers of geographically nearby, authoritative nonbelievers.</p>
<p>In the case of the supposed sonic attacks in Cuba, one approach to stemming the scare would have been a rapidly deployed on-site investigation by acoustic experts, neurologists, psychiatrists and military strategists. A folklorist as well wouldn’t hurt. Short of such a full-frontal counterattack, disseminating easy-to-digest skeptical information as early as possible in the process should help to slow the diffusion process and quell a mass delusion.</p>
<p>It’s easy enough to be caught up in a mass delusion. Fads and fashions are great examples, though their most harmful consequence may be our embarrassment when we look back on some of our previous style choices. As long as people are stressed and living in groups, most of our mass delusions will remain invisible to us until they have already run their course.</p>
<p><em>This is an updated version of an article originally published on Dec. 18, 2017.</em></p><img src="https://counter.theconversation.com/content/87493/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Markovsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sociologists know what conditions make it more likely a mass delusion will take hold and spread through a group – whether adherence to a fashion fad or belief in a doomsday cult.Barry Markovsky, Professor of Sociology, University of South CarolinaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/815722017-07-27T13:34:26Z2017-07-27T13:34:26ZSilicon Valley firms are over-valued – here’s why a correction is coming<figure><img src="https://images.theconversation.com/files/180004/original/file-20170727-8533-bypmnr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/manoftaste-de/9483452871/in/photolist-fs2b98-dgWV3R-mX3Xx3-6xiuGW-aaLcXm-7X4Zjj-wWuE8S-o5BTeY-axYa2o-wiHi9L-7VcHft-9ZdBc4-abetZ3-7mD4zj-7Ud1Lr-hfFRBb-asjYVj-6fYqJS-9xzoiS-dLd5kE-9HwDdB-bWvRyG-bsJvdf-iSbzHw-95VPKh-3Pft6B-bsJv7y-6hhQvg-agvuX9-GqM5CE-bFDozT-bsJvFh-a7bdks-bFDmZk-bFDnyv-e8Linq-bsJuD7-bFDmVa-bFDnNi-bFDo96-bsJxUm-HLu4Wo-bsJuiy-bsJu4m-HLu4ES-w97DVN-o9Zzhw-DERbat-PaXbLb-a1RwYP">Christian Schnettelker</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>As Facebook’s shares hit a record high, CEO Mark Zuckerburg will be patting himself on the back for bucking the trend and outperforming financial projections <a href="http://www.cio.com/article/3194866/it-industry/facebook-nears-2-billion-users-warns-ad-growth-will-slow.html">for eight consecutive quarters</a>. Meanwhile, many of his competitors are worried – and they should be. </p>
<p>While Evan Spiegel, 27-year-old CEO of Snapchat, enjoyed a yachting break, his company’s shares <a href="http://pagesix.com/2017/07/20/evan-spiegel-to-keep-sailing-with-bros-amid-snapchat-stock-dive/">sunk below their launch price</a>. The market is losing faith in the social sharing app’s ability to find features that Facebook cannot instantly copy. </p>
<p>Similarly, Travis Kalanick, ex-CEO of Uber, is also enjoying his <a href="https://theconversation.com/uber-gets-a-backseat-driver-as-kalanick-exits-top-job-79854">enforced break</a> as concerns grow around Uber’s business model and <a href="https://www.ft.com/content/09278d4e-579a-11e7-80b6-9bfa4c1f83d2">whether it can ever generate profit</a>. </p>
<p>Yet both businesses have been enormously effective in raising funds from investors. Uber has <a href="https://www.recode.net/2017/5/25/15686886/ride-hail-valuation-investment-uber-didi-lyft">raised around US$12 billion</a> and Snap <a href="https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/alexkonrad/2017/02/02/snap-ipo-means-big-windfall-for-early-snapchat-investors/&refURL=https://www.google.co.uk/&referrer=https://www.google.co.uk/">around US$6 billion</a> (if you include <a href="http://www.firstpost.com/tech/news-analysis/snap-inc-raises-3-4-billion-in-its-ipo-shares-will-start-trading-on-nyse-today-3698657.html">proceeds from its float</a>).</p>
<p>Other Silicon Valley perennial under-performers <a href="https://theconversation.com/livening-things-up-can-twitter-stay-afloat-through-new-innovations-54579">Twitter</a> and <a href="https://theconversation.com/whats-going-on-at-yahoo-54121">Yahoo</a> have similarly raised significant sums from investors but failed to provide any sort of return. Too many tech companies seem to be better at raising funds from investors than generating profits from their operations. This speaks to a fundamental issue with the tech market and the level of investment that is being poured into it.</p>
<h2>The search for returns</h2>
<p>Since the 2007-08 financial crisis, <a href="http://www.global-rates.com/interest-rates/central-banks/central-banks.aspx">interest rates have approached zero</a>, forcing businesses and investors with cash to find other means of generating returns. The stock market is the obvious place, as returns from private equity and hedge funds <a href="http://fortune.com/private-equity-investors-effect/">have also been declining</a>. </p>
<p>The sheer weight of money looking for opportunities forces investment into more marginal opportunities that yield lower returns. Conversely, this same weight of money has been pushing share prices <a href="https://www.theguardian.com/business/2017/may/16/global-stock-markets-whats-driving-the-rise-and-will-it-continue">ever higher</a>, despite the uncertainties of <a href="https://theconversation.com/what-the-stock-market-tells-us-about-the-british-economy-post-brexit-63981">Brexit</a> and <a href="https://theconversation.com/why-markets-have-bounced-back-after-the-election-of-donald-trump-68636">Trump</a>. </p>
<p>Nowhere is the problem of finding destinations for cash more evident than in Silicon Valley. Enormous amounts are channelled into almost any opportunity in the hope of hitting the next Facebook, Google, or Amazon jackpot, and riding the share price surge. In turn, some of the money being thrown off by these mega corporates is dribbling down through the acquisition of other tech businesses at sky high valuations. </p>
<p>Start-ups that are valued at over US$1 billion have become so common they have a name: unicorns. But investors should start to question their value following the stock market launches of companies like <a href="https://techcrunch.com/2017/07/10/snap-falls-below-its-ipo-price-for-the-first-time/">Snapchat</a> and recipe and ingredients service <a href="https://techcrunch.com/2017/07/05/blue-apron-falls-9-on-fourth-day-as-a-public-company/">Blue Apron</a>, which have both rapidly fallen below their float price. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"837309480111058951"}"></div></p>
<p>Valuations of US$24 billion for Snapchat made Spiegel worth US$5 billion. But there is no way of connecting this valuation <a href="http://uk.businessinsider.com/analyst-snapchats-valuation-numbers-dont-add-up-2017-3">with any hard statistics</a>, financial or otherwise from Snapchat’s books. And the banks which supported the float are becoming <a href="https://www.bloomberg.com/gadfly/articles/2017-07-13/snapchat-hasn-t-changed-but-investors-feelings-have">more sanguine</a> on the company’s outlook.</p>
<p>Uber has not yet listed, but is valued at <a href="https://techcrunch.com/2017/06/22/as-ubers-value-slips-on-the-secondary-market-lyfts-is-rising/">around US$50 billion</a> (down from US$68 billion a year ago), and backers have invested US$12 billion which is principally being used to fund incentives to drivers and customers. Uber is being launched amid significant incentives around the world, whatever the nature of the local competition. In effect, this consists of cheaper fares to passengers and subsidised pay to encourage recruitment of self-employed taxi drivers. </p>
<p>This is risky business. The unregulated taxicab industry is one that is traditionally viewed as unattractive to investors as profits have never done much more than cover drivers’ wages and car running costs due to the plentiful supply of drivers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180008/original/file-20170727-8516-13pj4gi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Uber risky?</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>Customers are fickle in that they will take the cheapest and most responsive taxi, and will have more than one taxi app. There is no patentable technology and most taxi businesses have their own apps. So once the Uber incentives cease, what is to stop the original taxicab companies claiming back market share? In short, app or no app, competition is fierce in this industry and there is little to guarantee Uber’s success.</p>
<h2>Sheer volumes of cash</h2>
<p>Silicon Valley firms are also awash with cash and the idea of giving it back to shareholders is apparently unappealing. Instead, much of it is spent on acquisitions which are partly intended to ensure competitor technologies do not reach a dangerous size. This is facilitated by the US Department of Justice, which has <a href="https://theconversation.com/are-us-antitrust-regulators-giving-silicon-valleys-free-apps-a-free-pass-63974">still not decided</a> whether normal competition law should apply in Silicon Valley. </p>
<p>Similarly, there is still a pursuit of the next big thing. Microsoft, for example, has spent almost US$60 billion on acquisitions such as <a href="https://www.wsj.com/articles/microsoft-to-acquire-linkedin-in-deal-valued-at-26-2-billion-1465821523">LinkedIn at US$26.2 billion</a>, and <a href="https://www.theverge.com/2016/5/25/11766540/microsoft-nokia-acquisition-costs">Nokia at US$7.2 billion</a>, along with more than a hundred others. It is not clear that any are delivering returns. Indeed, Microsoft tried to buy Yahoo for <a href="https://techcrunch.com/2008/02/01/wow-microsoft-offers-446-billion-to-acquire-yahoo/">US$45 billion</a> but luckily for them, the bid was rejected. Yahoo was eventually sold to Verizon this year – <a href="https://techcrunch.com/2017/06/13/verizon-closes-4-5b-acquisition-of-yahoo-marissa-mayer-resigns-memo/">for US$5 billion</a>. </p>
<p>It is likely that Microsoft’s attitude to risk is influenced by the <a href="https://seekingalpha.com/article/3586136-microsoft-earnings-preview-100-billion-cash-95-billion-held-overseas">US$100 billion of cash</a> it is sitting on. Google has bought more than 200 businesses, spending around US$24.5 billion on the ten biggest, including Motorola at US$12.5 billion. Facebook has been more prudent and successful, buying WhatsApp at US$19 billion in 2014 after paying US$1 billion for Instagram in 2012, then a 13 person operation. </p>
<p>Overall, the sheer volume of cash looking for a home is driving behaviour which in more “normal” times would be viewed as profligate and high risk. Indeed, investor behaviour has some <a href="https://www.wsj.com/articles/startups-spend-with-abandon-flush-with-capital-1412549853">similarities to the dot.com era</a> when it was seen as a good thing to burn through shareholder capital. </p>
<p>The canny investor may well be wise to let their cash rot in the bank rather than become involved in this casino, which runs the risk of coming to a sad end. <a href="https://www.theguardian.com/technology/2017/jul/02/is-it-time-to-rein-in-the-power-of-the-internet-regulation">Regulation is growing</a> and starting to catch up with technology, certainly outside the US. Sky high valuations bear little resemblance to future earnings capabilities and result from too much surplus cash and a wish to prevent competition growing up. A correction is coming.</p><img src="https://counter.theconversation.com/content/81572/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It hasn’t been a good round of earnings for Silicon Valley’s big names.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318702014-09-19T11:53:57Z2014-09-19T11:53:57ZIt’s no bubble: insane dotcom valuations reveal how integral tech is to our lives<p>A recent flurry of business mergers and acquisitions and stock market flotations in the US has prompted some financial commentators <a href="http://qz.com/265782/who-will-get-hurt-if-a-tech-bubble-pops-vcs-and-employees/">to predict a new tech bubble</a>. </p>
<p>The size of these buyouts and IPOs, and the businesses themselves, are so large they are almost beyond comprehension. The recent announcements about <a href="http://www.usatoday.com/story/tech/columnist/shinal/2014/09/15/alibaba-ipo-retail-investors-beware/15676371">Alibaba</a> and <a href="https://theconversation.com/the-10-billion-japanese-app-bringing-candy-crush-tactics-to-messaging-29354">Line</a> have had financial analysts in North America, Australia and Europe scratching their heads; the estimated values of their offerings are US$20 billion and US$10 billion respectively, for products that are relatively unknown beyond Asia. </p>
<p>Combined with a general lack of public knowledge about the biggest emerging techs and the various analyses by traders and advisers, the danger of a tech bubble bursting looks all too real. But a closer look would suggest a different, more continuous kind of boom.</p>
<h2>Huge price tags</h2>
<p>Despite the rhetoric of technology commentators about how the internet <a href="http://www.oecd.org/forum/about/Idea-Factory-2014-The-Future-of-the-Internet.pdf">breaks down boundaries</a>, the prospect of an Asian business eclipsing the stock market listings of Facebook or Visa to become the biggest ever still seems daunting to some. But the potential is also enormous. Alibaba has <a href="http://www.forbes.com/sites/quora/2014/05/08/how-did-alibaba-capture-80-of-chinese-e-commerce">captured 80% of China’s e-commerce market</a>, now larger even than that in the US, as well as 10% of all retail in China. But with only 40% of the Chinese population online, the potential for even further growth is very real.</p>
<p>At the same time, the portable virtual reality system Oculus Rift was bought by Facebook for US$2 billion, even though the consumer release date <a href="http://www.franchiseherald.com/articles/6830/20140916/oculus-rift-consumer-version-release-date.htm">is still unclear</a> and will likely come with a price tag of around US$500. This is a financially quantifiable step up from the original US$2.5m raised through their original Kickstarter campaign, which originally had a <a href="http://www.wired.com/2014/05/oculus-rift-4">very modest US$250,000 target</a>. </p>
<p>In a similar move the open-world, sandbox construction game Minecraft was <a href="http://www.theguardian.com/technology/2014/sep/15/microsoft-buys-minecraft-creator-mojang-for-25bn">bought by Microsoft for US$2.5 billion</a>. However, the deal does not bring with it key company personnel, including founder and original author Markus “Notch” Persson. He and the co-founders of the company will <a href="http://www.forbes.com/sites/samanthasharf/2014/09/15/microsoft-to-buy-minecraft-maker-mojang-for-2-5-billion">now pursue other projects</a>. </p>
<p>The self-destructing video and image messaging app SnapChat has been <a href="http://blogs.marketwatch.com/thetell/2014/08/27/snapchat-worth-10-billion-start-up-valuations-stoke-bubble-fears">valued at US$10 billion</a>. Despite the uncertain business model, the 700m images and videos the company claims it sends each day must offer some promise of a return, investors believe, despite the fact the service is free and without adverts.</p>
<h2>High is the new normal</h2>
<p>Looking at these figures it is easy to push comparisons <a href="http://www.youtube.com/watch?v=bUwu5CiESbc">with the tech bubble of 1999</a>, claim over-valuation and the degree to which each of these individual listings and company purchases represent <a href="http://www.theguardian.com/technology/2014/sep/16/tech-bubble-warning-investors-dotcom-losing-money">high levels of financial risk</a>. But 14 years on from the dotcom crash the world has shifted significantly. The wreckage of individual dotcom failures is set against a technology-driven daily experience for an increasing many for whom “<a href="http://www.theguardian.com/technology/2013/aug/23/tech-giants-data">data is the new oil</a>” (although even this claim <a href="http://blogs.hbr.org/2012/11/data-humans-and-the-new-oil/">has been disputed</a>). It is claimed that e-commerce has reached sufficient scale and market penetration that it is <a href="http://www.voice-online.co.uk/article/online-shopping-killing-high-street">killing off the high street</a>. </p>
<p>In short, this is not 1999. We are part of a world that is internet-based and has been experiencing a technology boom since the dotcom crash. Proof of this different world can be seen with Facebook’s listing on the NASDAQ in 2012 which was <a href="http://money.cnn.com/2012/05/23/technology/facebook-ipo-what-went-wrong">initially criticised</a>, but at an estimated valuation of US$184 billion can be seen now as a step in the company’s step into becoming a permanent <a href="http://www.usatoday.com/story/tech/columnist/shinal/2014/03/13/facebook-cracks-market-valuation-oracle-google-apple-microsoft/6343009">tech behemoth</a>.</p>
<p>The threat of a new dotcom bubble does not come from the fact that these very large numbers are all attached to technology businesses. Technology should represent the point of reassurance. What is questionable are the business models that have developed around funding technology startups, with <a href="http://www.techradar.com/news/world-of-tech/management/raising-funds-for-a-tech-startup-what-you-need-to-know-1249294">heavy use of equity funding</a>. </p>
<p>Even more concerning are the <a href="http://www.techrepublic.com/article/the-dark-side-of-venture-capital-five-things-startups-need-to-know">expectations of failure</a> in the culture of funding technology startups. Individual investors with limited resources, who can only afford to invest in one business, face making a difficult, best guess. For the equity funds seeking out the new Google – or a product that Google will later buy – investing in multiple startups can be compared to spread-betting to lower risk.</p>
<p>For those of us without access to large bundles of cash (that we are also prepared to lose) much of the excitement of supporting new technology can be gained through crowdfunding websites that offer the <a href="https://theconversation.com/kickstarter-is-turning-into-ebay-as-shoppers-play-investors-29798">promise of something tangible</a> at the end of the process. We do need the speculative market of technology startups to drive the development of new features on our phones, tablets and desktops. And for every individual failure, like a hydra, two more innovations will appear in the continuous boom of this digital era of data.</p><img src="https://counter.theconversation.com/content/31870/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gordon Fletcher previously received funding from InnovateUK.</span></em></p>A recent flurry of business mergers and acquisitions and stock market flotations in the US has prompted some financial commentators to predict a new tech bubble. The size of these buyouts and IPOs, and…Gordon Fletcher, Centre for Digital Business, University of SalfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/268432014-05-16T14:34:15Z2014-05-16T14:34:15ZThe markets are close to record highs, but they’re still the best long-term bet<figure><img src="https://images.theconversation.com/files/48729/original/2ftw26j9-1400246702.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">With stock markets close to record highs, should we be running for cover?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/ahmadnawawi/3808452611/in/photolist-bH1jW6-bta4vZ-6Nxjh4-5ZE85d-jcnfQU-fSAzj7-fSBDCP-7o9nna-6arYmX-8R1C1w-2EPQo-b8ndh4-5UqPpb-DiXYE-fSAAUv-41LMv-7gi33H-7gvpU-azKr2q-5mCd6i-bzd4M8-aeenJC-aEK49F-edJ1JT-2fsf8-6bxWCY-ir8RG8-5NgGbq-b8m6b6-91LSvi-91PE5J-9gi26F-b8n78K-ahM4qb-fKwPcL-b8kEYe-5gQECw-7bJuYE-7bEEMF-7bEEUr-7bJuGQ-7bJu7E-7bEEGB-7bEFsK-7bJuC3-7bEEPp-7bJutC-7bJux5-7bEF2e-7bEFgc">Ahmad Awawi</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The FTSE 100 <a href="http://www.thisismoney.co.uk/money/investing/article-2575754/he-UKs-blue-chip-index-reach-record-highs-Footsie.html">reached 6877.39 points</a> last week. It was the highest since its all-time peak of 6950.60 on December 30 1999 before the start of the deflation of the great dotcom bubble in January 2000. It is currently trading <a href="http://www.bbc.co.uk/news/business/market_data/stockmarket/3/default.stm">about 50 points lower</a>, but many analysts believe it will break 7000 before the end of the year. What does this mean for stock market investors, if anything?</p>
<p>To put this into perspective we have to remember that the stock market is the best asset class for investors with very long time horizons. To see this, suppose that for every year over the next 40 years you put £2500 into just one of the following asset classes:</p>
<p>(i) Gold
(ii) Property
(iii) The stock market</p>
<p>Based on the historical record of over 200 years, how much can you expect to have at the end of 40 years, after adjusting for the loss in value due to inflation?</p>
<p>The answers are surprising. Over the 40-year period you have invested a total of £100,000. <a href="http://www.amazon.co.uk/Stocks-Long-Run-Definitive-Investment/dp/0071800514">The expected value of your £100,000 investment at the end of 40 years is</a>:</p>
<p>(i) Gold: £100,000 </p>
<p>(ii) Property: £240,000</p>
<p>(iii) The stock market: £500,000</p>
<p>All of these figures are adjusted so that they are not distorted by inflation. What they show is that over the very long term, gold holds its value but doesn’t add anything. </p>
<p>The same is also true of property. The extra £140,000 comes from 40 years of reinvested rental income. The stock market is different. Over the very long term, it outperforms every other major asset class.</p>
<h2>Dark side of the boon</h2>
<p>These conclusions about investment performance are based not merely on the historical record but are predicted by standard financial theory. The stock market is the only major asset class that allows us to invest directly in human capital. A block of gold or a block of flats cannot write <a href="http://darkside40.pinkfloyd.com/">The Dark Side of the Moon</a>, invent the iPhone, television, motor cars, debit cards, ice cream or anything else.</p>
<p>In a mixed economy, value is created (and sometimes destroyed) by both the private and public sectors. In the private sector, value is created by businesses creating new products and services whose value is greater than the costs of creating them. </p>
<p>The simplest and most direct way of investing in this value creation is to buy shares in companies listed in the stock market. When a company creates value, the price of its shares goes up. After 40 years, the value of your shares will reflect 40 years of value creation by the companies you invest in.</p>
<p>So what meaning can we attach to the fact that stock markets in the UK and around the world are now approaching or exceeding their historic highs? </p>
<p>In actual fact, it is not really true. After adjusting for inflation, the UK and US stock markets are respectively about 25% and 5% below their dotcom peaks. The salient fact here is not that stock markets are high, but that they are only now approaching the levels achieved 14 years ago.</p>
<p>Stock markets move in slow cycles, with long <a href="http://www.investopedia.com/terms/b/bullmarket.asp">bull markets</a> and long periods, up to even 20 years, where they go nowhere. <a href="http://www.irrationalexuberance.com">As predicted</a> by behavioural finance, stock market bubbles are followed by extended periods when the market deflates to, or even falls below, fair value. </p>
<h2>The long retrenchment</h2>
<p>In the great dotcom bubble we witnessed <a href="http://www.irrationalexuberance.com">the greatest ever stock market over-valuation</a> in recorded history. An extended period of miserable returns is exactly what was predicted by behavioural finance theorists back in 2000.</p>
<p>On long-term measures of value, the UK stock market is now at fair value or even below fair value. One way of showing this is to <a href="http://www.fool.co.uk/investing/2013/08/13/this-pe-suggests-the-ftse-100-is-a-buy/">look at the long-term average for the UK ratio of stock market prices against the listed companies’ earnings (P/E)</a>. It is around 12 to 15, depending on which measure you use, while for the FTSE 100 it is currently around 13. </p>
<p>The long-term <a href="http://www.investopedia.com/terms/d/dividendyield.asp">dividend yield</a> (how much a company pays out in dividends each year relative to its share price) is around 4% and for the FTSE 100 it is now just below 4%. Looked at as a whole, over the next 10 years we can expect the FTSE 100 to deliver good investment returns that are in line with its long-term average.</p>
<p>But even a 10-year investment horizon is somewhat speculative when it comes to the stock market. Paradoxically, the stock market becomes more predictable the longer into the future that we look. While good returns over the next 10 years appear to be quite likely, excellent returns over the next 40 years appear to be a virtual certainty.</p><img src="https://counter.theconversation.com/content/26843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arief Daynes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The FTSE 100 reached 6877.39 points last week. It was the highest since its all-time peak of 6950.60 on December 30 1999 before the start of the deflation of the great dotcom bubble in January 2000. It…Arief Daynes, Principal Lecturer of Economics and Finance, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.