Bubble
Candlefocus EditorBubbles are a naturally occuring phenomenon linked to human behavior and the psychological effects of market euphoria. Investors become enticed by the potential of 'getting rich quick' and become willing to commit more resources to the asset than otherwise expected. This can drive the price even higher, creating an effect that is compared to an economic 'bubble.'
The build-up of a bubble typically begins with an increased demand for an asset, leading to a period of fast appreciation that is market driven rather than based on tangible evidence or fundamentals. These periods are often accompanied by speculation and leverage strategies, leading the asset's price to detach from the fundamentals that drove the initial demand. This disconnect frequently proves to be detrimental; when the bubble bursts, the asset often sees a swift and sharp declining price.
Financial bubbles have historically been seen in many different markets, and recently the cryptocurrency market in particular has seen a handful of bubbles. Bitcoin, the world's first cryptocurrency, experienced its own bubble in 2017 as its price rose to almost $20,000 before dropping to around $3,000 a year later.
The motivations behind a financial bubble can be complex and hard to interpret. Some economists argue that bubbles are caused by psychological factors such as overconfidence, over-enthusiasm, or simply a failure to correctly interpret data. Others argue that bubbles are more related to market cycles, or the result of an immature market reacting to exogenous events like monetary policies. Regardless of the causes, the effects of bubbles can be damaging, and investors should always be aware of the inherent risks that come from such a volatile market environment.