2 years ago, search and purchase volume exploded higher. Annual sales were up 200x, to $17 Billion. It wasn’t just nerds talking about them anymore, countless celebrities got on board and started promoting the “investment”. By August, you couldn’t go a day without hearing about them. The NFT bubble was in full effect, and what came next should have surprised nobody:

NFTs may be the poster child for speculative excess in 2021, but they weren’t the only speculative asset that lost value: Collectibles at large such as classic cars, watches, artwork, sports memorabilia, and cryptocurrencies have all dropped substantially.

Identifying the bubble as it was inflating wasn’t hard (we even wrote a blog about it HERE).

Pointing out market manias is a lot like walking into a party where everyone is already drunk; they’ll let you know right away.

During a bubble, it will be obvious that “fair value” calculations don’t justify the price. The growth narrative relies on urgency (think “limited opportunity”), scarcity, and head-scratching future applications.

The main problem is that bubbles can always get bigger. Social media and a 24/7 news cycle spread greed & fear faster than ever before, which speeds up the bubble cycle.

Additionally, prices seem to keep going up AFTER you decide NOT to buy. This makes it extra tempting to throw caution to the wind and dive in.

In college, My friend Mike used to say “The most important thing about a party is knowing when to leave”. That goes for speculative investing as well.

Investment bubbles are like parties: they're always fun until the music stops. Or the cops show up. Or the Fed raises interest rates to flush liquidity out of markets.

Here’s what to do if you think there’s a bubble forming:

If you haven’t invested, and prices are soaring, it’s best to:

• View the market from a place of skepticism.

• Do your own research; Don't just invest in something because everyone else is doing it.

• Be patient, and don't feel like you have to rush in. The best investments are often the ones that you can continue to make over time.

If you Have invested and find yourself as a participant in a potential bubble:

• Consider selling some of your position. That might mean taking out your cost basis, cutting the position in half, or putting in limit sell orders. In any case, make rules to protect yourself from riding it all the way, or down.

• Double down on financial research to make sure your original thesis is intact.

• Keep an eye on the headlines; asset prices tend to correlate with attention. When investments are making front-page news, prices tend to be high, and vice versa.

• There’s wisdom in admitting when you’ve had enough and walking away.

Nobody ever rings a bell at the top of a market. You can only ever know the “perfect time to sell” in hindsight. However, keeping your guard up can spare you the pain.

I know a lot of people who’s recovered from hangovers, and a lot who haven’t from a popping bubble.