Sunday, July 12, 2020

Bubbling Troubles: 5 Market Bubbles To Watch Out For

market bubbles

Smaller market bubbles have ‘popped’ up in the current market

 

By Sharon Lewis

 

Today, tulips can be purchased for a handful of dollars. The value they were traded at in the early 1600s, however, could be enough to put you through an Ivy League B-School four times.

 

Tulip Mania refers to a speculative bubble that gripped the Dutch market in the 1630s. Imported from Turkey, the Dutch quickly took a liking to the then-exotic flowers, so much so that investors began trading tulip bulbs speculatively. Tulip trade prices rose to a point where the best bulbs would trade for upwards of $750,000 at today’s rates.

 

This lasted until a day when some buyers decided they did not want to pay astronomical prices for flowers that wouldn’t last beyond a week. The market crashed, and the Dutch had created what came to be known as the world’s first speculative bubble.

 

From the 2008 subprime mortgage crisis that plunged the world into recessions, to the infamous dot-com bubble of the late 1990s, the world has seen several market bubbles since then.

 

But just like tulip mania, not all market crashes have global repercussions. Some are smaller, and pass by without the world taking note. Here are five such bubbles in the market that experts predict will pop – but no one can tell when.

 

1. Bitcoin and other cryptocurrencies

 

Ever since the introduction of Bitcoin in 2009, despite the naysayers, the cryptocurrency craze has persisted.

 

The value of the crypto market rose steeply to reach $800 billion between 2017 and 2018. By September 2018, however, the market crashed severely, in an 80% drop from its peak. Bitcoin lost almost a third of its value within one week by November 2018.

 

The market has picked up since then, partly due to events such as the Bitcoin halving, but views on the market differ starkly. Some believe that there is no bubble in the crypto market, which is volatile by nature as a decentralized financial instrument.

 

Others say that the 2018 crash was just an example of the real bubble that will emerge as the market grows.

 

2. Chinese bike sharing

 

In 2018, images of China’s ‘bicycle graveyards’ surfaced, showing bicycles in the hundreds of thousands piled up at impound lots and scrapyard.

 

All this began in 2017, when bike sharing became a popular choice of transportation in Chinese metropolitan areas. Companies, however, overestimated just how much people liked the concept.

 

The market grew too big too soon, with companies seeing a bigger opportunity than was present at the time. A deluge of new bicycles went out on the streets with each new company that joined the bandwagon.

 

The trend, however, failed to keep pace with this growth. The Chinese government and large Chinese companies eventually had to step in to salvage the market and bail out drowning players. Today, the bike sharing market in China is largely dominated by these companies, and has seen a slight resurrection – for now, the market is in a stabler place.

 

3. Food delivery

 

From big players such as GO-JEK, Rebel Foods, Deliveroo, and Zomato, to newer players such as Hangry, the delivery segment in the foodtech industry has made room for several trends like the surge in the ride-hailing sector or the emergence of cloud kitchens.

 

The catch is that the profitability of food delivery companies is dubious. UberEats is doing so poorly, it’s predicted to either shut shop or sell out, and recently exited eight different markets.

 

Other players such as Zomato, DoorDash, and GrabFood are also far from profitable, yet the market is not only growing but also making room for new entrants, and attracting continued funding from investors as the sector booms during COVID-19.

 

An unfortunate truth across all industries is that market bubbles are seldom realized before they pop, and food delivery could be showing signs of nearing its bursting point.

 

4. Startup Valuation

 

The recent WeWork and Luckin Coffee fiascos are perhaps indicative of a larger startup bubble driven by over-valuations. Where unicorn status was once a milestone accomplishment to be celebrated, it is now a trend that has led to more than 400 companies globally making it to this once-lonely peak.

 

With startups picking up higher burn rates, investors demanding better terms, founders becoming poster-children for poor governance, and global initial public offerings dropping 27% in 2019 (the lowest since 2016), some worry that the world is looking at a potential valuation bubble.

 

5. Higher Education

 

Even as students take on more debt to put themselves through college, the value of degrees is falling in the compressed labor market. Some say that this could point to a higher education bubble, and this idea is gaining traction.

 

Take the United States for instance. Apart from weighty student loans, students have also resorted to financial aid through scholarships and grants, or even crowdfunding their college degrees.

 

However, the rate at which students are enrolling over the past few years has been declining in the United States, and there is a fair amount of debate on whether the costs of college education correspond to the pay that graduates receive in the short term.

 

The thing to understand about bubbles is that until they burst, all projections are, at best, educated guesses. It is only when the bubble bursts that some investors and experts who were on the right side of the opinion divide can come to say ‘I told you so’.

 

Predicting whether these market bubbles will actually burst or stagger back to sustainability has little practical use, given the variables involved and their combined volatility. However, what the numbers do reveal are the markets that are in poor shape and in definite need of an overhaul – and if the warning signs are ignored, they’ll eventually reach a point of no return.

 

Header image by Alexander Dummer from Pexels

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