A Beginner’s Guide: What is Crypto Bubble?
In economic or financial terms, a bubble is formed when people begin to buy a particular asset, which increases the demand and reduces the supply. Due to this phenomenon prices of that particular asset go up and up. Suddenly, this high-valued bubble burst and left the people with less value for their investment.
Cryptocurrencies have been continuously evolving since their inception back in 2009. More people are engaging with this industry day by day, which results in an increase in the crypto market. This gain in the popularity of the crypto industry caused the crypto bubble. So, what is the crypto bubble?
What is the Crypto Bubble?
Whenever people start buying a huge volume of a particular cryptocurrency to get profits in the future, the price gets too high. The demand and supply equilibrium is disturbed marginally and suddenly prices begin to fall.
At this moment, people panic and start to sell cryptocurrency in order to secure their investment. As time passes, more people sell off cryptocurrency which results in a total crash of that particular coin.
The bubble burst due to the extreme and sudden selling of that particular cryptocurrency and left many traders in loss. Sometimes, it does happen when this bubble starts expanding again and saves investments of many.
How to Spot a Cryptocurrency Bubble Before it Forms?
Spotting a cryptocurrency bubble might be a difficult task for professional traders too. But here are some things that you might consider to avoid your money being trapped in a bubble burst.
Here are several indicators that a cryptocurrency bubble is developing or already exists:
1. Rapid Increase in the Prices
A fast increase or abnormal increase over a short time in the prices of cryptocurrency is the first sign to indicate the formation of a bubble. The unrealistic demand in the market occurs when people buy a cryptocurrency in high volume.
What to do in these circumstances? Watch the market very closely, if the demand seems to be unnatural instead of realistic and sustainable then, it is better to stay away for a while.
2. Boost Over the Internet
Hype of cryptocurrency over the internet, and across social media platforms might be a sign of bubble formation and soon it will burst out. News like “Next Bitcoin in the Industry” has no authentication most of the time.
So, whenever you sense such social media hype, do proper research on authentic websites to know whether the trends are real or artificial.
3. Short-Term Investments
The burst of a bubble after its formation is due to the huge amount of short-term investment in cryptocurrency. These investments move the market toward instability and cause high prices but for a shorter period of time, after that cryptocurrency may follow a downtrend.
How to carter this situation? Carefully follow the market news and trends in order to get an idea for investors. If it seems to have fluctuations in prices, then it might be an indication of a bubble burst.
4. Mass Volume Trading
The circulation of unauthentic news from social media platforms increases the activity of amateur traders, who are just following social media trends and starting to buy cryptocurrency. The mass volume trading of cryptocurrency without authentic news or events is a clear sign of bubble formation.
Observe the market closely, and wait for a while when you spot the mass volume trading pattern. When you identify that many amateur traders are involved in trading, then it is advisable to stay away.
What are the Risks Associated with Cryptocurrency Bubble?
The formation and burst of a cryptocurrency bubble is not predictable, you may enter into a bubble unintentionally, as it is quite tough to get an idea about it. As per research, bubbles in cryptocurrency markets can affect systemic risk in the energy sector. There are several risks associated with a cryptocurrency bubble that you must be aware of to minimize your capital loss.
Here we discuss three major risks associated with the cryptocurrency bubble:
1. Burst of Bubble
The first and the major risk associated with the bubble is the burst of the cryptocurrency bubble. This risk leads the traders to lose the investment that they have made while buying the coin at relatively high prices during the formation of a bubble.
2. Crash of Cryptocurrency
You may recover from the burst of the bubble, as there are still chances for the formation of a new bubble of cryptocurrency. But you cannot survive if cryptocurrency vanishes from the earth. Some experts suggest that crypto will eventually crash, leading investors to a total loss.
3. Fraud and Scams
Lastly, be careful about the selection of coins for investment purposes, more than 5000 types of coins have been deployed, and only a few are authentic and circulating in the market. Invest in those coins who has a proper history and a pattern. Otherwise, there are very high chance that you face fraud or a scam.
Past Occurrences of Crypto Bubble
The crypto bubble has occurred on various occasions in the past. The most popular cryptocurrency or coin of all time is Bitcoin, standing ahead with the largest trading volume. Check out the table below that shows the crypto bubble formation and burst of Bitcoin from time to time.
Final Thoughts
It’s crucial to understand that not all gains in the prices of cryptocurrency are the formation of bubbles, sometimes the demand for cryptocurrency is valid depending upon the validation and advancement of technology.
Initially, the bubble burst of cryptocurrency was considered to be an abnormal phenomenon. But thanks to the technology, crypto is revolutionizing with the passage of time. The crypto bubble burst becomes a part of the industry and traders have the ability to carte the risks associated with the bubble burst.
In the end, it is suggested to follow authentic sources of upcoming market trends and invest in those coins which has a decent past record. Always remember to begin your trading journey with a small amount, and guidance from a financial adviser.
