What is a cryptocurrency bubble? How to detect it and protect your investments?
What is a cryptocurrency bubble?
In financial markets, a bubble occurs when the price of an asset rises significantly above its true or sustainable value, driven by speculation, hype, and excessive optimism. In cryptocurrencies, bubbles form when investors seek short-term gains without a full understanding of the technology or the risks underlying the project.
During bubbles, demand rises significantly, pushing prices to unsustainable levels. Eventually, when confidence fades, the bubble bursts, leading to sharp corrections that inflict heavy losses on newcomers.
Why do cryptocurrency bubbles occur?
Cryptocurrency markets are particularly susceptible to bubbles due to speculation and fear of missing out. Many investors buy because they see quick gains, not because of strong fundamentals. Media hype and social media interest also play a significant role, as social media trends and viral news lead to unrealistic expectations.
Another reason is the excitement over new technologies. Each cycle often has a theme that captures public attention, such as initial coin offerings (ICOs) in 2017, decentralized finance (DeFi) in 2020, or non-fungible tokens (NFTs) in 2021.
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