Bubble is a term used to describe a financial market state when asset prices rise rapidly but are not supported by fundamental value. This increase in price often causes investors to become excited and purchase the asset, which further increases the price in a positive feedback loop. Bubbles usually start out as an anomaly that catches people’s attention, before quickly becoming overvalued.
The most famous example of this phenomenon is known as the Tulip Mania bubble which occurred in 1637 when prices for tulip bulbs reached stratospheric heights, only to crash several months later causing widespread economic ruin among those who had invested heavily in them. Another notable bubble was the dot-com bubble of 1999-2000 when technology stocks soared then crashed abruptly after companies failed to reach profitability or expand their customer base enough to sustain their share prices.
In cryptocurrency markets, bubbles typically occur due to speculation about future value and FOMO (fear of missing out). When traders expect a coin or token’s value will increase substantially due to news or events such as upcoming forks or new partnerships with large companies, they buy it up creating a buying frenzy that drives up its price until it reaches unsustainable levels at which point it crashes back down again. It’s important for crypto investors not get swept up into these kinds of speculative bubbles and instead focus on fundamentals like project development progress and user adoption metrics when making investment decisions.
