Cryptos have become extremely popular worldwide. They promise decentralized financial systems that are not limited by borders. Over time, coins like Bitcoin, Ethereum, and others have shot up in value and then crashed hard.

These big swings in prices have led to what’s called “crypto bubbles.” In this article, we’ll discuss crypto bubbles, explain why they happen, look at signs they might be coming, and examine how they affect money.

What is a Crypto Bubble?

A crypto bubble is when cryptocurrency prices shoot up fast because people are excited and guessing they’ll make a lot of money. But then, just as quickly, the prices crash back down to where they started or even lower. Crypto bubbles often start because new investors jump into the market without understanding the risks or much about the technology behind the coins they buy. Sometimes, bad people mess with the market, or big news makes everyone suddenly want certain coins.

The Origin of a Crypto Bubble

While crypto prices, particularly that of Bitcoin (BTC), were volatile leading up to 2017, by the end of that year, BTC soared to its all-time high (ATH), satisfying crypto investors. However, once BTC hit $19,798.68, many investors were gripped by FOMO (fear of missing out) and rushed to buy BTC.

Yet, those who fell prey to these bubbles ended up losing more than 100% of their investment in just one week. Indeed, the term “Bubble” aptly captures its essence. Analogously, when you inflate a balloon, it may appear large, but it’s essentially empty, correct?

While the originator of the term “Crypto Bubbles” remains unknown, it continues to be widely used across various forums today. Similarly, “Crash,” which shares a connotation similar to “Bubbles,” is another frequently employed term.

Key Reasons Causing a Crypto Bubble

Now that we understand a crypto bubble, let’s explore its dynamics and how different elements come into play.

• Speculation: Speculative behavior is a major driver behind the inflation of crypto bubbles. Many investors enter the cryptocurrency market not because they believe in the intrinsic value or utility of the coins but rather to sell them later at a higher price to turn a profit.
• FOMO (Fear of Missing Out): FOMO often compels investors to join the market because they fear missing out on potential gains. Cryptocurrencies, particularly those with limited supplies, are often viewed as scarce assets that could be appreciated over time. This scarcity mindset frequently triggers FOMO among investors, prompting them to buy into the market at inflated prices.
• Media Hype: Positive media coverage and hype surrounding cryptocurrencies can fuel a bubble. News stories featuring overnight millionaires and remarkable returns can fuel investor excitement and attract more people to invest in the market.
• Herd Mentality: During periods of rapid price escalation, investors may simply follow the crowd without conducting research or analysis. This herd mentality can exacerbate market movements and contribute to the formation of bubbles.
• Lack of Regulation: Fraudulent activities and market manipulation can thrive without clear regulatory guidelines and safeguards, leading to increased volatility and unsustainable price surges. Conversely, abrupt regulatory interventions or crackdowns on cryptocurrencies can burst the bubble as investors rush to exit the market. The recent anticipation of the SEC’s ETF decision is a pertinent example.
• Low Barrier to Entry: Cryptocurrencies are accessible through online platforms and exchanges, lowering the entry barrier for new investors. While this accessibility can result in a surge of inexperienced investors entering the market, driving prices higher, it also poses challenges in selecting a reliable platform to navigate one’s financial journey with confidence.

How Does a Crypto Bubbles Work?

• Initial Excitement and Adoption: A new cryptocurrency, technology, or blockchain project grabs attention for its potential utility, innovative features, or promises to shake up existing industries. This sparks an initial wave of interest and investment as early adopters and enthusiasts embrace the concept.
• Speculative Surge: As more people catch wind of the potential for hefty returns, speculative investors flood into the market, aiming to capitalize on the upward price momentum. This influx of investment further fuels demand and prices, creating a self-reinforcing cycle.
• Media Buzz and FOMO: With prices continuing to climb, mainstream media outlets and social media influencers jump on the crypto bandwagon, attracting even more investors. Fear of missing out kicks in, driving people to invest hastily without fully grasping the technology or risks involved.
• Irrational Euphoria: Prices may skyrocket to unsustainable heights, often surpassing the actual value or utility of the underlying assets. Greed takes hold, and investors may ignore fundamental analysis in pursuit of quick profits.
• Peak and Correction: Eventually, the bubble hits its zenith as buying pressure wanes or negative news surfaces. At this juncture, some early investors may start selling their holdings to cash in on profits, potentially triggering a sell-off. Prices tumble, triggering panic selling and exacerbating the downturn.
• Bubble Burst: The bubble bursts when prices nosedive dramatically, erasing significant portions of investors’ wealth. Various factors, such as regulatory crackdowns, security breaches, technological flaws, or a loss of market confidence, can trigger this collapse.
• Recovery and Consolidation: Following the burst, prices typically stabilize at a lower level as the market undergoes a period of consolidation. Projects with robust fundamentals may bounce back and thrive, while weaker or fraudulent ventures may fade into obscurity.

Can Investors Profit From Crypto Bubbles?

Although the allure of quick profits during a crypto bubble may be tempting, it’s crucial to approach it with caution. Crypto bubbles come with substantial risks, including the potential for significant losses.

Crypto bubbles embody a mix of speculation, hype, and human psychology. They showcase the volatile nature of the cryptocurrency market, marked by swift price swings and speculative excitement.

Nevertheless, it’s worth noting that while crypto bubbles can result in notable financial setbacks for investors, they also offer valuable learning opportunities for the market at large. They underscore the importance of doing thorough research, comprehending the underlying technology, and adopting a long-term investment outlook rather than giving in to short-term speculation.

Moreover, they serve as a reminder that crypto investment demands prudence, knowledge, and a steadfast adherence to sound investment principles.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.