Do you remember the turn of 2021-2022 when NFT prices reached dizzying, and every friend tried to convince you to invest in the latest “revolutionary” cryptocurrency? It was a typical example of a speculative bubble on the crypto market – phenomena that cyclically visits the world of digital assets, leaving behind crowds of disappointed investors.
In the world of cryptocurrencies, speculative bubbles are not an exception, but a rule. The history of the digital assets market is a band of violent increases and spectacular falls that can erase billions of USD from market maps within a few months. For an experienced investor, the recognition of the upcoming bubble can mean a difference between life profit and a catastrophic loss.
What is a cryptocurrency bubble?
The cryptocurrency bubble is a phenomenon in which the prices of digital assets rapidly rises far beyond their actual value, driven primarily by speculation, media hype and the Fomo effect (Fear of Missing Out – fear of missing the occasion). This price explosion does not result from the fundamental value of the projects, but from the psychology of the crowd and uncontrolled market emotions.
The key characteristics of the bubble is the dynamic increase in prices in a short period, complete detachment of valuations from the actual utility of projects and the dominance of speculation over fundamental analysis. We also observe the mass influx of new, inexperienced investors and intense media hype with celebrities promoting subsequent investments.
Why are cryptocurrency bubbles formed?
Human psychology is the main bubble motor. When prices are rising, more and more people believe that the trend will persist indefinitely. The Fomo effect means that investors buy on the market top, afraid to miss the “opportunity of life”. Social and traditional media strengthen madness, focusing on spectacular profits, while celebrities and influencers (often without deep knowledge about blockchain technology) promote subsequent projects to their observers.
Unlike traditional financial markets, investing in cryptocurrencies requires only a smartphone and a few clicks. This availability means that crowds of inexperienced investors can quickly come to the market. In addition, the cryptocurrency market due to its youth and lack of strict regulation is susceptible to manipulation. Internships such as Wash Trading, i.e. artificial increasing the volume by trading yourself with themselves, can artificially overstate prices and activity indicators.
Boom ICO 2017-2018. History lesson
The largest bubble in the history of cryptocurrencies began in 2017 along with the Initial Coin Offerings (ICO) explosion. In one year, projects on Blockchain have gained almost 40 times more capital than in the previous year. Over USD 15 billion was obtained by ICO in 2017-2018, Bitcoin reached the summit of USD 19,783 in December 2017, and Ethereum increased from around USD 10 at the beginning of 2017 to almost USD 1,400.
Most of the projects only offered “white books” full of unreal promises, without working products. Investors bought tokens based solely on speculation and promises of future profits. The result was devastating – 95% of ICO projects eventually failed, and investors lost about 90% of the value of their investments.
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NFT/DEFI cycle 2021-2022. Repetition of entertainment
The second great bubble exploded during the Covid-19 pandemic, when loose monetary and locking policy directed the attention of investors to digital assets. NFT’s monthly turnover regularly exceeded USD 500 million, projects such as Bred Appeal Yacht Club and Cryptopunkt reached the prices of millions of USD for individual pictures. Even the celebrities got involved in this madness. Justin Bieber bought NFT for USD 1.31 million, which today is worth around USD 59,000, and Logan Paul lost over USD 613,000 on a single NFT from the Azuki collection.
The fall of this bubble was as spectacular as its growth. By the end of 2022, the NFT market fell by 97%, and most DEFI projects lost over 90% of its value. One of the most dramatic examples to this day is the fall of the Terra ecosystem, where Luna’s cryptocurrency fell from ATH at 119 51 USD to practically zero during the week. The total losses of investors at that time amounted to USD 45 billion.
How to recognize the upcoming bubble?
Recognition of the bubble before its cracking is an art that requires observing several key signals at the same time. The first and the most obvious is parabolic growth, i.e. when the price chart looks like an explosion directed vertically upwards.
Healthy upward trends are characterized by corrections and consolidations, while the bubbles show a constant growth without any significant withdrawal.
It is equally important to detach prices from the foundations. If the price of the token increases by thousands of percent, but the design has no working product, users or income, it’s a classic red flag. Extreme mood indicators, such as the Fear & Greed index at the “Extreme Greed” level above 80, ubiquitous optimism in social media and the complete lack of skeptical voices in discussions also signal danger.
Media signals are equally meaningful. When traditional media begin to write about “ordinary people becoming millionaires thanks to crypto”, the bubble probably approaches the top. History shows that the involvement of celebrities in promoting specific crypto projects often coincides with market peaks. If your hairdresser, mechanic or grandmother start to give you investment councils regarding cryptocurrencies – it’s time for increased caution.
From a technical perspective, the extreme use of the financial lever by most traders means that the smallest correction can cause a cascade of liquidation. Promising projects 10,000% of annual returns or guaranteed profits are almost certain signs of fraud or an unbalanced business model.
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Capital protection strategies
Protecting capital during a bubble requires primarily discipline and prior preparation of the strategy. The principle of gradual outing is fundamental – do not try to hit the top of the market perfectly. It is better to sell gradually during increases, realizing partial profits at every price level. Set the STOP-LOSS levels in advance and stick to this decision, even when emotions suggest differently.
Diversification remains crucial – do not put all funds in one project or sector. Spread investments between various areas and asset classes. Keeping an investment journal will help you maintain objectivity and learn from mistakes, writing the reasons for each decision.
Psychological management is equally important. Limit the time spent on social media and channels promoting “quick profits”, focus on fundamental analysis. Regular breaks from the market observing and turning off the stock market applications on weekends will help maintain a long -term perspective, which is more important than everyday fluctuations.
Practical tools include the use of price alerts instead of observing charts throughout the day, the use of Dollar Cost Averaging the other way – just as you buy small amounts regularly, just as you sell gradually during increases. Always keep part of the wallet in stable assets (stablecoin), ready for use during correction.
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Can you earn on bubbles?
The answer is yes, but it is an extremely risky undertaking. History shows that the best investors do not try to predict peaks and holes, but build positions during bear market and gradually reduce them during the bull market. If you decide to consciously “surf” the bubbles, the key rules are entering early and going out early – it is better to earn 300% and go out “too early” than to lose 80% trying to catch the last 50% growth.
Never invest money that you can’t lose. This principle is particularly important during bubbles when emotions make your logic suppress you. If you consciously play in a bubble, treat it like gambling, not like a long -term investment, and approach it with the right attitude.
The future of cryptocurrency bubbles
Will the bubbles disappear with the ripening of the market? Probably not. As long as human emotions, greed and fear remain in the game, cyclical manners will be part of the financial landscape. We can expect longer cycles between bubbles, smaller extreme fluctuations thanks to better regulation and greater involvement of institutional investors stabilizing the market.
The upcoming areas of potential bubbles may include tokens related to artificial intelligence and machine learning, gaming and metaverse (despite the fiasts from 2022), and toxinization of real assets (RWA), where the digitization of traditional assets carries great speculative potential.
Cryptocurrency bubbles are an inevitable element of the digital assets ecosystem. The key to success is not to avoid them, but conscious risk management and understanding of market psychology. History repeats itself, but never in the same way, and the best investment occasions appear when everyone looks at the market pessimistically.
Remember that greed and fear are the worst financial advisers, while education and patience remain the best tools of every investor. Are you ready for the next bubble? It will probably come faster than you think. Prepare a plan, stick to it, and maybe this time you will be the one who will come out with your face when the bubble finally breaks.
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