The arrival of chartists and trend followers

We argue that when the price of a financial asset increases, initially it is because its fundamental value has increased. “Fundamentalist” investors, who respond to the discrepancy between an asset’s fundamental value and its price, dominate; the dynamics of the asset’s price is stable and it converges towards the new, higher fundamental value. But the rise in the asset’s price attracts “ chartist ” or “ trend follower ” investors, who buy when they see the price rising. When the proportion of these chartist or trend follower investors exceeds a certain threshold, the dynamics of the asset’s price becomes unstable and it can increase without limit. This dynamics, with a sharp rise in prices from the date chartists and trend followers become numerous, can be observed in the recent period in the cases of equities and cryptocurrencies.