A little history…
The first bubble in history was born 400 years ago in Holland. At the time, it was not the Bitcoin which was exchanged at a gold price but the tulip, which then became a symbol of luxury.
Some farmers were willing to sell their farm to invest in a single tulip bulb in hopes of making a fortune.
On February 3, 1637, trust broke, there were no more new bidders and the bubble burst. This is the end of “tulipomania”.
Nowadays, we speak of a speculative bubble when an asset increases excessively over time and moves away from its real value. Like a soap bubble, the market can rise and then end up suddenly bursting, causing prices to fall sharply.
A bubble bursting is synonymous with crisis and bankruptcy, we think back to the subprime crisis of 2007, but what is also true is that each time, investors make a fortune during these cataclysmic periods. This is how Mark Baum and his team raked in $1 billion by shorting the market as depicted in the movie The Big Short.
What about today ?
But how is the current period similar to a bubble bursting and how can we guard against it and even profit from it?
Since a picture is worth 1000 words, here is the diagram of a speculative bubble compared during the NASDAQ since 2012.
Diagram of a speculative bubble
NASDAQ prices since 2012
Source: FXFlat FlatTrader platform
According to the diagram, we would therefore currently be in the bursting phase which is characterized by fear.
What is the reason for this bursting?
The causes that can explain this bursting are numerous. The markets have been artificially supported in recent years by monetary injection, quantitative easing and with a low interest rate policy led by the central banks.
The Covid crisis has not prevented central banks from continuing on this dead end, but this paradigm has changed.
The Russian-Ukrainian crisis was certainly a trigger for the bursting of this bubble by driving up the price of raw materials and inflation, but it is important to keep in mind that this is not the root cause. of this burst.
How to guard against it and take advantage of it?
As you read this article, you are in one of these scenarios:
- Either you are already exposed to the market.
If you already hold stocks, cryptocurrencies or other assets, you may be able to cash in your losses if the price of your assets has moved unfavorably in order to reallocate this money to other more successful assets.
With a long-term perspective, you can on the contrary keep your assets while waiting for a market turnaround, but you will have to think about hedging yourself on other assets and diversify your portfolio well. Placing stop-losses (orders that will automatically close your positions at a price fixed in advance) will allow you to limit your losses and protect your capital.
- Or you are not.
If you are not exposed to the market, having too much cash on hand is also not a solution. With an inflation rate of 5.4% in June 2022, your money loses value if you don’t make it grow.
To take advantage of the market decline, you can either:
– Wait for prices to fall to buy the shares at a better price. Because who says explosion, also says opportunities and new entry points.
– Selling short, that is to say, speculating downwards on shares in order to accompany the downward trend that is occurring.
How to buy and short sell with FXFlat broker?
At FXFlat, you can to buy Where sale shares in 0 commissions and trade a multitude of assets.
Here is an example of a 0 commission short sell order on Tesla stock.
Source: FXFlat FlatTrader platform
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