A market bubble in cryptocurrency trading is where the prices of cryptocurrencies significantly rise above their intrinsic value due to excessive market speculation and trader enthusiasm. This rapid increase is often fuelled by a combination of media hype, social media influence, and FOMO amongst traders.
Characteristics of a market bubble include a rapid price increase, where prices of cryptocurrencies skyrocket within a short period; speculative investments, where traders buy cryptocurrencies primarily for short-term gains rather than based on fundamental value or long-term potential; and media hype, where extensive coverage and promotion of cryptocurrencies in the media contribute to the frenzy.
High trading volume, where an unusually high volume of trades occurs as more people enter the market, also factors into a market bubble. As do psychological factors like FOMO, which drive more people to invest, further inflating prices.
Bitcoin’s price surge in 2017 is an example of a market bubble, where its price rose from around $1,000 at the beginning of that year to nearly $20,000 by December 2017. This was followed by a sharp decline in 2018, when many new cryptocurrencies were launched through ICOs, leading to significant speculative investments and subsequent crashes.
Consequences of a market bubble burst include loss of trader confidence, scrutiny by governments and regulatory bodies, and a market correction, where prices of cryptocurrencies adjust to more realistic levels based on their intrinsic value.
