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Between the stock market, bitcoin, and tech IPOs, today everyone seems in a race to spot the next biggest asset bubbles readying to pop.
The term "asset bubble" indicates that there is a marked, noticeable divergence between the market price of an asset and its fundamental value. In other words, something that people store value in – a coin, a house, a share of stock – is valued much, much higher than the thing itself could possibly be worth.
Bubbles usually end with crashes: double- or triple-digit percentage losses in the price of the inflated asset over a very short time.
Bubbles – called "manias" prior to the 18th century – have probably been around as long as people have wanted to get rich quickly.
The next biggest asset bubble to pop remains to be seen, but in order to break the top five, it has to be incredibly damaging.
Just take a look at the five biggest bubbles to ever exist, and the destruction they inflicted on the economy:
Five Biggest Asset Bubbles Ever
Asset Bubble #1: Tulipmania, 1636-1637. The first asset bubble, the one everyone knows, started in the Netherlands, and the asset involved was the harmless, beautiful tulip. It's unclear exactly how this bubble got started, but it probably had to do with the novelty of the flower. The tulip had only just been introduced from the court of the Ottoman Sultan and was unique among European flowers, at the time, for its vibrant, unadulterated color. The tulip seems to have been a conspirator in its own bubble. The bulbs take nearly a decade to mature, and only last a few years thereafter. And then there was the "Tulip-breaking virus," which changes the coloration of tulips, resulting in vivid striations in the normally single-colored bloom. These infected bulbs were the focal point of the speculative bubble. According to Charles Mackay's Extraordinary Delusions and the Madness of Crowds, a single bulb of the coveted "Viceroy," with a pattern of imperial purple and white stripes, sold for between 3,000 and 4,100 guilders in 1636. The "Semper Augustus" – tulip growers often gave grandiose names to their rare bulbs – sold for 1,000 guilders in the 1620s and 5,500 guilders in 1637, according to The Economist. A skilled laborer, by contrast, might earn 150 guilders in a year. Economist Earl Thompson showed a 20-fold increase in the price of tulip bulbs between November 1636 and February 1637. In February 1637, though, buyers simply stopped showing up to routine auctions. Prices collapsed, falling 20-fold between February and May 1637. The bubble popped, but the Netherlands would continue to be a financial powerhouse well into the 18th century.