The cryptocurrency market is a place where you can find both interesting investment opportunities that can change your life and a huge risk of losing most of your capital. It takes just a few days or hours for the price of a cryptocurrency to increase by hundreds or even thousands of percent… or to drop almost to zero.

One of the most famous and at the same time most dangerous phenomena in this market is the cryptocurrency bubble.

In this article, I will explain to you what a speculative bubble is, where it comes from, I will talk about the most popular examples from the history of previous cycles, and I will provide you with practical tips on how not to get caught up in this dangerous speculation.

What is a cryptocurrency bubble?

A cryptocurrency bubble is a situation where the price of a given cryptocurrency rises very quickly, often in a short time, reaching unrealistic levels, i.e., levels that are not supported by its real value.

Such an increase is usually driven by hype - i.e., significant optimism and emotions of investors, rather than actual achievements of the project.

A bubble, as the name suggests, sooner or later 'bursts' and then prices fall, often as quickly as they rose. As a result, those who bought at the peak incur significant losses and usually never recover the invested capital.

The mechanism is similar to that in traditional bubbles in the real estate, stock, or commodity markets. The difference is that in cryptocurrencies, everything happens much faster, sometimes within a few days or weeks.



Why does a cryptocurrency bubble occur?

There are several reasons, but they usually occur simultaneously:

  1. FOMO (Fear of Missing Out) - the fear of missing out on the opportunity of a lifetime.
    When we see others making 200%, 300% in a month, it is easy to be tempted and buy some token without deep analysis.

  2. Media and influencers - headlines like 'Cryptocurrencies that will make you a millionaire' or YouTuber titles like 'There will be such increases that your EX will want to come back to you and you'll say NARA', can attract thousands of new investors.

  3. Snowball effect - the more people buy, the higher the price goes, which encourages others to enter the market 'because it's rising'.

  4. Lack of regulation - in the crypto world, there are still definitely fewer rules than in traditional financial markets, which makes it easier to promote dubious projects and artificially inflate their valuations.

  5. Unsubstantiated promises - many projects promise a 'revolution in the industry' or 'profits without risk', but in reality, there is not even a finished product.


Famous examples of cryptocurrency bubbles

Cryptocurrency bubbles appear regularly, usually during the last months of a bull market, in previous cycles we had several such situations:

  • The ICO boom in 2017 - hundreds of projects sold their tokens to investors, promising breakthrough solutions. Many raised millions of dollars for development, but never delivered working products. After the bubble burst, most lost 90-99% of their value.

  • The DeFi and NFT bubble in 2021 - decentralized finance protocols and collections of digital NFT images reached absurd valuations. Some JPG files were sold for hundreds of thousands of dollars. Currently, many of these assets have dropped almost to zero.

  • Memecoins - such as Dogecoin or Shiba Inu, which grew by hundreds of percent in a few days after a mention in the media or a tweet from a well-known person, and then fell sharply.


How to recognize a bubble?

There is no one perfect way to recognize a speculative bubble at its early stage to potentially protect yourself from it, but there are certain warning signs:

  • Parabolic chart - the price rises almost vertically without a clear reason (e.g., without a new product, update, or announcement of a partnership).

  • Promises of unrealistic profits - if a project guarantees 100% in a week, it is likely trying to scam you or is selling something worthless.

  • Mass promotion on social media - if you see a token everywhere, in memes, among influencers and celebrities, it is often a sign that hype is more important than fundamentals.

  • Lack of a functioning product and fundamentals - if a project has been in the 'plans for the future for several years' stage and the price is rising, the risk of a bubble is huge.

How to protect yourself from a cryptocurrency bubble?

  1. Do your own research - check who is behind the project, what achievements they have, whether they have a functioning product and a realistic development plan.

  2. Set entry limits - before purchasing, decide how much you can invest at most and at what profit/loss you will exit.

  3. Diversify - never put all your money into one project.

  4. Avoid investing under the influence of emotions - especially at the moment when 'everyone says you should buy'.

  5. Follow the market continuously - e.g., using Binance check current cryptocurrency prices, to see how quotes are changing.

Are bubbles always bad?

Although it sounds strange - not always. Bubbles often attract media and investor attention to new technologies.

Thanks to the ICO bubble in 2017, many projects that are still operational today were created. Similarly, during the NFT boom, platforms and tools were developed that found applications outside the cryptocurrency world.

The problem starts when someone invests all their savings, counting on a quick profit and has no plan B in case of declines.

Summary

Cryptocurrency bubbles are a natural element of the market - they appear and disappear, and their size and duration are not easily predictable.

Therefore, if you want to invest wisely, you need to learn to recognize the moments when it is no longer worth entering the market and not succumb to emotions.

Analyze projects,track the market, establish an exit strategy and never invest more than you can afford to lose.

The awareness that hype can turn into panic at any moment is your best shield against losing capital.