Bitcoin and three other investments that look like classic bubbles but actually aren’t – MarketWatch

Bubbles? Those arent bubbles.

Charles Schwab SCHW, -1.21% global strategist Jeff Kleintop says there are plenty of red-hot investments out there that might look like bubbles, but, in reality, they just dont fit the classic profile.

Bubbles typically bring risks for all investors, even those that dont own the inflating asset, he explained, because they represent a broader market and economy that has become out of balance and dependent upon a flawed outlook.

Previously, these bubbles of the past have inflated 1,000% over 10 years before bursting, cutting prices by more than half in the following two years, Kleintop explained. By the time they eventually popped, these investments had become fixtures across investors portfolio. Hence, the sweeping impact of their implosion.

As you can see from this chart, he pointed to the Nasdaq COMP, +0.27% crude oil CLQ7, +1.51% precious metals and home-builder stocks as obvious examples:

But what about those deemed bubbly in todays climate? Kleintop says the four most popular candidates are cryptocurrencies, low volatility, internet retailers and central bank assets. He applied his 1,000%/10-year filter to these investments

Remarkably, none of these seem to fit the classic profile of a potentially damaging bubble, he said. But that doesnt mean they dont carry risks for investors.

First, while bitcoin BTCUSD, -2.91% for example, has topped the 1,000%-return mark, it accomplished that feat much faster than the 10-year period.

Also read: Bitcoin rival, ethereum, has lost $17.5 billion in market value in 4 weeks

See also: Stay away from bitcoin and ethereum they are complete garbage

The shorter amount of time that it took may mean that if bitcoin is a bubble and were to burst it probably wont have as broad of a ripple effect on the economy as the technology or housing bubbles did, Kleintop said, pointing to this chart

Next, low volatility, specifically the VIX VIX, -1.98% is another area of concern. From one perspective, its 800% surge over the past 10 years pretty much matches the classic profile, but Kleintop says thats misleading.

While the pattern seems to line up fairly well with prior bubbles, he said, it would look different with a much larger rise and have more time to go until it reaches the 10 year time frame if I shifted the start date to the end of the bear market in March 2009, when volatility last peaked.

Then there are the internet retailers, like Amazon AMZN, -0.23% Clearly, these stocks have been on fire, but Kleintop says the relatively small size of the group keeps it from being a typical bubble and may limit the amount of damage a bubble pop would have on the broader market.

Unlike typical bubbles which tend to foster a purely optimistic outlook, these companies have already had a negative impact on the stocks of their traditional retail peers, leaving the overall retailing industry (composed of 10 sub-industries including internet retailers) up a smaller 500% over the same period, he wrote.

Finally, central bank assets, while clearly bloated by years of quantitative easing, dont exactly fit the mold, either. The balance sheets of the worlds central banks have grown about 300% over the past decade, coming up well shy of the 1000% level of the typical bubble.

The global buildup of debt most likely represents a long-term liability that threatens to exacerbate downturns, rather than a bubble about to burst, he noted.

Bottom line, Kleintop says that there doesnt seem to be any classic bubbles forming among the ones most commonly referred to as potential candidates. But remember that bubbles are sometimes only seen in hindsight, he said, which is why we always counsel diversification.

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Bitcoin and three other investments that look like classic bubbles but actually aren't - MarketWatch