We made it! The US election is over. There is no civil war in the US. The Budget is now complete, with two big uncertainties removed from the UK stock market. Crypto is also spiking, with Dogecoin worth more than 64 per cent of all S&P 500 constituents at one point earlier this month. This is funny, given that it’s a joke coin with no actual use. But around the world, there will be gamblers flush with wealth, as cryptocurrency has put money into the pockets of many.
The promise of quick riches and consequent reckless behaviour is not unusual to financial markets. The tulip bubble, the railway bubble, the dotcom bubble, and previous crypto bubbles, all of these follow the same patterns. As Larry Livingstone in Reminiscences of a Stock Operator said, the game doesn’t change, only the players.
Speculation itself can be hugely profitable when traders approach this with a healthy appetite for risk backed by logical decisions and sound risk management. Many people believe that when you spot a bubble, you should short it. I think this is wrong. Bubbles are powerful, and the story sucks in many a new participant. They want to believe the story and aren’t interested in logic. And because the story keeps sucking more people in, the price goes higher, and it becomes self-fulfilling. Eventually, there is no greater fool, and the price begins to fail to beat new highs, people get scared, and it becomes a rush for the exit, with trapped participants grimly holding on until they can’t take it any more, and selling into any rallies.