Dr Donald Rapp is the author of the fascinating ‘Bubbles, Booms, and Busts’ which explains what to look out for when it comes to bubbles and how to get out before it goes bust. We spoke to him about his predictions for bitcoin and other cryptocurrencies and his insights were brilliant.
Bubbles come around every now and then in a cyclical way, and Dr Donald Rapp has made a career out of studying them. He understands what causes these bubbles and what the signs to look out for are when they are about to burst. Right now, the biggest bubble happens to be bitcoin. Dr Rapp suggests that this should have burst quite some time again, yet it still persists. Could it, then, be a new plateau?
Dr Rapp isn’t so sure. He is convinced that the bitcoin bubble will collapse, but what interests him is why it will happen. Right now, bitcoin is paving the way to a new kind of currency; a currency that the banks don’t have any say in. That’s exciting, but it’s worrying for the big financial institutes around the world. Bitcoin could be the future.
The questions that Rapp wants to think about is whether it’s bitcoin that is causing the bubble or whether it’s blockchain in general? Wouldn’t it make more sense to buy shares in the company underpinning the currency rather than the currency itself?
Dr Rapp understands what a bubble bursting looks like and he knows there are some tell-tale signs when that is about to happen. It starts off logically – there is always a reason why something takes off massively. Take the 1920s, for example; it was the vision of the future, the movement towards an industrial society that excited people and caused them to buy shares in crazy volumes. Then there was the .com bubble; again, it was the excitement of what was happening, this futuristic idea. The problem in these cases and many others (and perhaps in bitcoin too when it finally does burst) is that people become so enthusiastic about the potential for growth that they bid the prices up too much.
After this, their enthusiasm changes. No longer is it about buying stock for the potential that it has; it becomes about buying stock simply because it is rising. So the stock prices are going up artificially, and once it reaches that point the bubble has to burst because it simply can’t sustain itself.
Since Dr Rapp has seen this happen many times, he also knows that it only takes one thing, one big international act, to trigger the plummet. It could be anything from a terrorist attack to an earthquake, but whatever it is, it is world-shaking.
We know that all bubbles burst and we know that all artificially growing stocks are bubbles, yet we keep repeating the same thing over and over. Why? The answer, according to Dr Donald Rapp, is simple; we’re greedy. Buying stocks when things are rising so rapidly is a good way to make money fast, and many people do. It’s the one who just don’t get out in time that have the problem. For the others, the reward is worth the risk and it all works until it doesn’t work anymore.
Historically bubbles haven’t slowly deflated – they have burst. It will be some international, unpredictable event that will cause the drop to happen. The same forces that drove the market up will pull it down. Greed will turn into fear and more people will sell, making the drop faster.
The biggest casualties for bubbles are the last entrants into the market. This happens when the psychology reaches fever pitch, when people are buying so they can sell extremely quickly. People are buying things when they don’t even know what it is, but the growth is huge so they bought anyway. It’s madness and isn’t a good way to trade in normal life.
Dr Rapp predicts that cryptocurrencies will become common place in 20 to 30 years. But like in any bubble there is a real, logical expectation of great growth. It happened in the 20s, it happened with the .com bubble too – it’s real, but it got ahead of itself. It’s the same with cryptocurrencies. It will be a long, hard road.
Dr Donald Rapp can be contacted at firstname.lastname@example.org.