A Beginner’s Guide: What Are Crypto Bubbles?

The cryptocurrency market has been witness to several instances of bullish rallies of assets which have experienced a drastic rise and a consecutive fall. But is this phenomenon normal? The answer is no. It is not normal to experience such cycles in the crypto market. In economic lingo, these dramatic financial cycles are known as “Bubbles”.

Also read: How to Set Up a Crypto Wallet?

Crypto Bubbles: Explained

The cryptocurrency market has witnessed several instances of speculative bubbles, where the perceived value of cryptocurrency assets exceeds their hypothetical worth. Economists and prominent investors have expressed concerns about the speculative nature of the entire cryptocurrency market.

Crypto bubbles typically emerge when excitement surrounding a specific asset drives a rapid price escalation. As more investors join in, the price surpasses the asset’s intrinsic value. It is important to note that not all rapid price increases signify a crypto bubble. Price jumps during post-recession recovery periods, for instance, can be justified by traditional investment evaluation factors.

Instances of Crypto Bubbles

The most well-known boom and subsequent crash occurred in 2017 and 2018. After a tremendous surge in 2017, the price of Bitcoin fell by about 65% from January to February 2018. By September 2018, cryptocurrencies as a whole had collapsed by 80% from their peak, surpassing the dot-com bubble’s decline. The crash was exacerbated by cases of fraud, such as the Bitconnect scandal, and regulatory actions. In November 2018, the market capitalisation for Bitcoin fell below $100 billion, and its price dropped below $4,000.

Between 2020 and 2021, there were several crypto bubbles. In March 2020, Bitcoin’s price experienced a sharp 30% decline due to the COVID-19 pandemic. However, Bitcoin later reached new record highs in November 2020 and early 2021, with a surge of over 700% since March 2020, surpassing milestones like $40,000 and $50,000. Despite this upward trend, there were significant price corrections, including a 23% crash in less than 10 days in April 2021.

Throughout 2022 and 2023, various events occurred, such as regulatory actions, bankruptcies, withdrawal freezes, and the collapse of major exchanges. The collapse of Terra-Luna, a stablecoin, also contributed to the overall market instability.

Detecting Crypto Bubbles 

Identifying a cryptocurrency bubble can pose challenges, even for seasoned traders. However, there are indicators that can assist in determining the viability of a cryptocurrency investment versus the risk of a bubble. 

Rapid Price Increase

A significant and swift rise in the price of a coin or token may indicate unreliable and unsustainable demand. Such rapid price increases can suggest overvaluation of the cryptocurrency. To gauge the situation, it is recommended to monitor the price over an extended period. If the price rises considerably without substantial news or technological advancements to support it, it may be an indication that a bubble is forming.

Inflated Valuation 

A cryptocurrency’s market capitalisation, which represents the total value of all coins in circulation, can rise rapidly to a high level. This can be a sign of the asset becoming overvalued. To calculate market capitalisation, multiply the current price of the coin or token by the total number of coins in circulation. If a specific coin’s market capitalisation increases rapidly without a corresponding increase in practical use or real-world adoption, a bubble may be forming or already in progress. 

Market Saturation 

While widespread interest in a cryptocurrency isn’t always a negative sign, it’s essential to examine the participants involved in trading. If many individuals trading a particular cryptocurrency have limited knowledge about it or the market in general, it suggests a potential bubble. Exercise caution when considering investment if the majority of investors or traders have little to no prior experience in crypto. 

Lack of Real-World Utility 

With thousands of cryptocurrencies in the market, only a fraction possess genuine practical use or potential. If a cryptocurrency receives more hype than actual real-world adoption and attracts significant investments, it could indicate a bubble. It’s crucial to assess whether the cryptocurrency in question has tangible utility beyond speculative interest.

What Should Traders Do During a Crypto Bubble?

During a crypto bubble, effective management of the market and trades is crucial. If a coin’s price experiences a rapid surge, it is advisable for traders to consider selling a portion of their holdings to mitigate potential losses. In the event of a bubble burst, traders have the option to either hold the coin for long-term potential or sell to minimise further losses. Staying updated on crypto news, price trends, and regulatory changes allow traders to strategically plan their exit strategy with minimal loss. 

Conclusion

Identifying crypto bubbles is one of the biggest challenges that traders face nowadays in the crypto market. The cryptocurrency market in general is very volatile, requiring traders to stay informed with the latest news and updates. However, they should also learn how to identify crypto bubbles in order to avoid them and face losses.

Frequently Asked Questions

When Did the First Crypto Bubble Occur? 

The first major cryptocurrency bubble occurred in 2017 and early 2018. During this period, the price of Bitcoin and several other cryptocurrencies experienced a dramatic surge, reaching all-time highs. 

Is There a Bitcoin Bubble?

No one can say with absolute surety whether Bitcoin is experiencing a bubble or not. This is due to the problems determining Bitcoin’s value. Bitcoin is still in its fledgling stage and its price can give the appearance of bubbles forming and then popping. 

When Was the Last Crypto Bubble?

The last crypto bubble that traders experienced was in 2022 when Bitcoin fell from its peak of $47,686 with a loss of 30%.