The cryptocurrency industry is one of the fastest-evolving ecosystems financially benefiting investors, as it provides access to money without any barriers. Compared to institutional businesses that require certain documents and information in exchange for a bank account or a loan, cryptocurrencies allow you to do anything with them as long as you know how to manage your portfolio.
Unfortunately, achieving these goals doesn’t come easy because users must overcome the learning curve and their own fears and insecurities regarding the crypto market. The crypto environment contains plenty of terms to describe even the tiniest operation on the blockchain, with which people must familiarize themselves. For example, if you want to learn how to purchase Bitcoin, you must first get accustomed to the meaning of a private key, Bitcoin address, and volatility.
One of the most complex concepts in the crypto ecosystem is a simple bubble, one of the most dynamic features leading to a price decline. Let’s examine it.
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Crypto Bubble Triggers
Crypto bubbles are known as a phenomenon during which prices boom as a result of too much excitement from investors looking to maximize their investments. However, this period doesn’t last long because it’s followed by a significant decline, similar to a bubble bursting.
A few factors trigger the bubble to burst, such as the following:
- A massive flow of new investors looking for fast money;
- A trend of FOMO (fear of missing out);
- Increasing media coverage with positive news;
- A trending herd effect, in which people simply follow other investors;
The Stages of a Crypto Bubble
Although they’re all unique, most bubbles happen in the same manner, as they’re triggered by regular factors, while investor sentiment and action are pretty always based on FOMO. So, this is what basically happens:
- New crypto projects drew massive attention, leading to a massive spark of interest and investment;
- The influx of investments boosts demands, so investors are looking to capitalize on the momentum;
- The media catches up with the newness and contributes to speculations, driving people towards FOMO;
- Prices continue to increase, supporting investors’ green and making them ignore the obvious signs of a bubble;
- The bubble reaches a peak, and prices slowly start declining, during which early investors start selling;
- The bubble bursts, and prices decline dramatically, mainly if based on regulatory crackdowns or security breaches;
- Prices begin to stabilize after some time after the bubble, with essential projects recovering;
Massive Crypto Bubbles Through the Years
Crypto bubbles were quite frequent, one of the earliest being recorded two years after Bitcoin’s release on the market. Another one followed in 2015, followed by some of the worst cryptocurrency timelines.
The 2018 crash was the result of a significant price boom in 2017, when Bitcoin prices fell by more than half of their previous value in only one month, with all the other cryptocurrencies going in the same direction. Later that year, Bitcoin fell by about 80%, reaching a low of $4,000.
In the meantime, cryptocurrencies recovered, but the bubbles between 2020 and 2022 appeared. After a considerable increase, cryptocurrencies slowly declined. Bitcoin went down by 23%, Ethereum by 30%, and Dogecoin by 45%.
Still, the time between 2022 and 2024 was also challenging, as the creators of Luna and TerraUSD filed for bankruptcy after their coins’ collapse. Other lawsuits followed, affecting crypto prices.
How Should Investors Prepare for a Crypto Bubble?
Investors should always be wary of market changes because there are signs through which they can sense a bubble. For example, when crypto prices increase rapidly, there’s high volatility and high trading volumes are peaking, so users should be more cautious than usual.
However, even if they’re caught in such a market bubble, they can protect their assets with proper strategies. First, learning how to diversify your investments continuously is important regardless of the threats because it can minimize your losses. It would also be best to have multiple crypto wallets, so as not to put all investments in a basket.
Moreover, in addition to being up-to-date with the latest market trends, investors must learn discipline and stop investing due to FOMO or biases. The dollar-cost averaging technique is best in this case because it allocates a certain number of assets every now and then, despite prices, to even out risks and opportunities.
What About the Bubble Results?
In most cases, investors also need to face the challenges post-bubble, in which prices are low, and the general investor sentiment is negative. That’s when they need to rebalance or asses their portfolios based on further risks because some crypto projects can be more profitable than others.
On the other hand, analyzing the previous bubbles to understand what drives them and the worst possible situation will prepare them for any unforeseen outcome. While it’s almost impossible for the Bitcoin price to go down to zero, it might happen again for its value to decrease significantly.
Researching profitable but cheap cryptocurrencies will also help with diversification and portfolio maintenance. However, users need to do thorough research to avoid putting themselves at greater risk.
Some investors believe they can make profits during the bubble if they’re quick and smart enough. While it may be possible to do so, with considerable research and fast decision-making skills, the risks are incomparable with the gains because crypto bubbles are mostly speculation and hype. At the same time, investors will contribute to the bubble only based on their biases, fears, and thoughts, so anything happening during the bubble might be no less than a fever dream.
Do You Think a Crypto Bubble will Burst Soon?
Cryptocurrency bubbles are some of the most dangerous phenomena in the industry because they initially showcase a considerable price boom, luring investors to boost their strategies, followed by a significant decline. Many users have lost their long-time assets during crypto bubbles as they sell everything out of fear. However, the market eventually stabilized, which is why people should approach a leaner method in which they diversify their portfolios and closely follow the market.
