A bubble is an economic cycle characterized by the rapid increase of market value, particularly in the prices of assets usually followed by a rapid decrease in value or a contraction, referred to as a “crash” or a “bubble burst.” During a bubble, assets trade at prices or within a price range that substantially exceeds the asset’s perceived intrinsic value.
Bitcoin and other cryptocurrencies have been labelled severally as one of such bubbles, most notably due to their highly volatile nature. Bitcoin, for instance, experienced the worst crash of any bubble in late 2018, losing over 80% of its value – a crash considered worse than the infamous Dotcom bubble of 2002.
Effect of a crypto bubble crash
The damage caused by any bubble burst fundamentally depends on the economic sector(s) involved, the extent of participation, and to what extent debt fueled the investments that inflated the bubble. A crypto bubble burst would cause a rapid decline in the market valuation across various digital assets, resulting in capital loss as asset prices fall below purchase price. The crypto market generally becomes less liquid, consequently affecting funding for new crypto projects.
Signs that can indicate a bubble
The first (and obvious) sign of a crypto bubble is that the prices of assets are trading at high prices and soaring almost at an alarming but exciting rate without a corresponding increase in their intrinsic value.
This is usually followed by a massive influx of investors looking to make a quick buck out of the exciting trend, a term popularly known as FOMO (fear of missing out) in the crypto community.