What is a crypto bubble, and are we in one right now? How and why do cryptocurrency bubbles form, and what are the warning signs? These questions bother many investors, which is why we decided to create a short guide on crypto bubbles.
In this guide, we’ll explain how a cryptocurrency bubble works, and we’ll discuss the warning signs that can lead to its formation. We’ll also list the most prominent examples of past cryptocurrency bubbles.
What Are Crypto Bubbles?
A cryptocurrency bubble refers to a sudden surge in crypto prices driven by speculation, FOMO, and hype. This phenomenon also pumps up the price of a certain digital currency above its hypothetical value.
Why does this phenomenon occur? There are several answers to this question. The first includes an increasing number of crypto investors who hope that the crypto market will bring them additional income.
Another includes the FOMO effect. This effect often occurs when crypto whales show interest in a particular cryptocurrency. FOMO makes investors start buying crypto as they’re afraid that they might miss out on the opportunity to make money.
Is crypto a bubble in 2024? No. According to the crypto bubble chart, cryptocurrency prices have remained fairly stable throughout 2024. However, this could change next year because of the recent BTC halving. Historically, the price of BTC has risen significantly about a year after the halving event. If BTC hits a new all-time high in 2025, the prices of all cryptocurrencies will likely rise, potentially creating a new crypto bubble.
How Does a Crypto Bubble Work?
Now that you know what is a crypto bubble, here’s how it forms:
- Initial hype and adoption. The best new cryptocurrencies will attract the attention of investors with their ambitious roadmaps and groundbreaking features to create hype. This will make investors start buying tokens during their presales to maximize their profits.
- Speculative investment. Speculative investments can also contribute to the formation of a crypto bubble. Many individuals begin investing in cryptocurrencies solely to make money from increasing prices. For example, they buy tokens when the price is low and sell them when the price rises. This surge in investment will impact the demand and supply.
- Media attention and FOMO. A sudden jump in the price of a certain cryptocurrency will lead to the FOMO effect, especially if famous people start talking about it. Due to the Fear of Missing Out, inexperienced investors will start massively buying a particular token without understanding its technology or use cases.
- Irrational exuberance. Investor enthusiasm will then lead to an increase in the price of cryptocurrencies above their hypothetical value.
- Peak and correction. The crypto bubble will peak, prompting presale investors to start selling their tokens and triggering a sell-off.
- Bubble burst. A crypto bubble burst will occur when the price of certain tokens begins to drop dramatically. A burst can be triggered by regulatory or technological issues and security breaches.
- Recovery and consolidation. Once the bubble bursts, the prices of cryptos will start stabilizing. However, they will usually trade lower than their initial values. Only projects that survive the burst will recover.
Examples of Past Crypto Bubbles
The first crypto bubble phenomenon happened in 2011, and it was inflated by speculation about BTC as a new form of currency. This caused the price of BTC to jump from $1 to over $30. However, once the bubble burst, its price dropped to around $2.
Another notable crypto bubble occurred in 2013, when BTC started receiving media attention. Its value jumped from $13 to $1,100 before falling to $500.
Ethereum also experienced a crypto bubble in 2017 due to hype around its technology. Its price jumped from $10 to over $1,400 before plunging to $100. In the same year, due to FOMO, BTC experienced a sudden jump in price from $1,000 to nearly $20,000, after which its average value was around $3,000. This shocked investors, who started doubting the adaptability and stability of digital currencies.
Besides BTC and ETH, Bitcoin Cash, Ripple, and Dogecoin also experienced a crypto bubble in 2017, 2018, and 2021, respectively.
Warning Signs of a Crypto Bubble
Signs indicating that a crypto bubble may be created around certain crypto include the following factors:
- High trading volume. A sudden boost in the trading volume of a certain cryptocurrency may be an indication that a crypto bubble could soon form. Large fluctuations in the number of buying or selling orders are most often a sign of emotional trading, not rational analysis.
- Market capitalization. If the market cap of a certain crypto grows unexpectedly, that is, if its market cap surpasses its realistic value, there is a great possibility that a crypto bubble has been formed. This is especially true for tokens that have no real-world utility, i.e., for coins whose value is based on mere speculation.
- Volatility. Extreme volatility is another warning sign that a crypto bubble could be formed. Namely, small price oscillations are common in the cryptocurrency world. However, if the price of a certain cryptocurrency changes significantly within a short period of time, it may be a sign of speculative trading.
- Fear and Greed Index. The Fear and Greed index is a tool that shows how stable the crypto market is. If this index constantly shows extreme fear or extreme greed, it’s a sign that the crypto market is driven by emotion.
- Increased margin trading. Margin traders borrow funds from crypto exchanges to increase their buying power. A sharp increase in margin trading levels can be a sign of increased speculative activity.
Conclusion
To sum things up, what is a crypto bubble? A crypto bubble is a phenomenon that refers to sudden price fluctuations caused by speculation, hype, and FOMO. A crypto bubble will cause the price of a certain cryptocurrency to trade above its realistic value. Once a crypto bubble inflates, it will burst, which will usually result in the collapse of the project or a significant drop in price.
You can protect yourself from this phenomenon by diversifying your portfolio, monitoring market trends, and avoiding emotional trading.
FAQs
Can investors profit from crypto bubbles?
Yes, in theory, investors can profit from a crypto bubble if they’re lucky or if they have inside knowledge. However, this rarely happens in real life due to the highly volatile nature of the crypto market.
What are the main risks of cryptocurrency bubbles?
The main risks include financial losses, loss of investor confidence, and fraudulent activities.
Is Bitcoin a bubble?
Yes. Namely, BTC halving events can form supercycle bubbles that will affect other altcoins as well, as was the case in 2021.
Alan, a seasoned Crypto Analyst, boasts an impressive tenure in the financial sector. With years of expertise specifically in cryptocurrency, he now lends his deep knowledge to Business 2 Community, ensuring their readers are well-informed and supported in the ever-evolving crypto landscape.
His commitment to factual accuracy and relevance is paramount, evidenced by his prior roles. Alan's credentials extend beyond crypto; he's penned insightful pieces as the chief editor for prominent platforms such as Buyshares.co.uk, Learnbonds.com, StockApps.com, and InsideBitcoins.com.
Alan's mastery in the field is fortified by his significant editorial roles, contributions, and his ability to bridge complex crypto concepts with clarity.
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