Bitcoin Buyers, Beware: Consider These 5 Classic Asset Bubbles

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Until recently, many people had never heard of Bitcoin. But the hyperbolic rise in the price of the digital crypto-currency -- from $5 as recently as mid-2012 to more than $100 recently -- has captured broader attention as financial crises (most recently the one on Cyprus) continue to make markets and investors nervous about traditional, government-issued currencies.

Proponents argue that the rise in Bitcoin's value and use marks a lack of confidence in those fiat currencies whose value is under the influence of central bankers and politicians. Skeptics point back at a long line of economic bubbles as they predict an eventual plunge in Bitcoin prices.

Economic history is on the side of the skeptics. Let's take a look at five other assets that gained even more intense interest among speculators and ordinary investors before their bubbles burst, sending prices back down to earth.

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Bitcoin Buyers, Beware: Consider These 5 Classic Asset Bubbles
Though flower bulbs might seem an unlikely asset to trigger rampant speculation, the Tulip Craze is often cited as the first recognized economic bubble. In the 16th century, tulips were first brought from Turkey to Western Europe, where the colorful flowers became extraordinarily popular. But it was in the 17th century that the vivid blooms hit super-fad status, especially in Holland, where they become a much-sought-after luxury item. By the 1630s, some rare varieties of tulip bulbs traded at prices equal to that of an house, with the entire limited supply of bulbs changing hands multiple times every day. Based on the limited price data still available, the Dutch tulip bubble apparently reached its peak in early 1637, after which prices plunged by 95 percent to 99 percent in the span of just a few weeks.
Before the economic meltdown of 2008, the biggest bear market that most living investors had seen was the plunge from 2000 to 2002 -- the Dotcom Bust that resulted from a  bubble in Internet-related technology stocks. During the late 1990s, the adoption of the Internet for commercial purposes led to an explosion in investing, as the early successes of AOL and Amazon.com convinced many investors that just about any business with a connection to the Internet would produce huge profits. But many of these businesses lacked any reasonable strategy or plan to profit, and the result was, eventually (and inevitably) debacles like Pets.com. Although some high-flying tech firms survived the Internet bust, the vast majority met their end during the bear market.
Looking at the large population of the Sunshine State today, it doesn't seem all that surprising that Florida real estate would have a history of high demand from land speculators. During the 1920s, the strong economy and soaring stock market left many Americans with the means to invest. The general perception of Miami as a paradise led to unprecedented marketing efforts from developers who sought to create brand new cities well into the Everglades. As brokers and dealers pushed plots to investors, trading activity reached a fevered pitch. But when negative reports from financial publications brought the true value of the land to light, buying interest dimmed, and an ill-timed hurricane put an end to the boom in 1926, leaving Florida in the grips of economic decline that lasted until after the Great Depression.
When investors think about precious metals, rhodium isn't the first to come to mind. But during the first half of 2008, prices of the rare metal shot from less than $1,000 an ounce to more than $10,000 before plunging back to the $1,000 level when the financial crisis hit. Because its most common use is in catalytic converters for cars, investors saw rhodium as a play on the auto market, and its rarity helped inspire speculators to keep bidding prices higher. Yet -- just as had happened earlier in the decade with palladium -- the rhodium boom came to an end quickly once it became clear that demand wouldn't support the inflated prices.
After its defeat in World War II, Japan recovered and became one of the fastest growing, strongest economies in the world. By the 1980s, it was commonly predicted that Japan's economy would soon exceed the size of the U.S. economy, and that the country's culture and language would come to dominate the global commerce. Land speculation helped fuel the Japanese economy, but the availability of cheap financing led companies to take on increasing levels of leverage in their real estate portfolios. From 1984 to 1989, the Nikkei stocks\ index soared from below 10,000 to nearly 39,000, only to plunge in the ensuing years when the bubbles burst. The Nikkei touched the 14,000 level in 1992, and the land of the rising sun settled into period of economic stagnation that still persists today.
The moral of these stories: While it's impossible to know when Bitcoin's bubble-like rise will reverse itself, given the weight of history, it's almost certain that it will.
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Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our newsletter services free for 30 days.
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