You’ve seen those dramatic peaks and valleys in Bitcoin prices lately that leave your stomach doing flip-flops.
Talk of bubbles bursting sends shivers down your spine. Is the crypto craze just froth that’s bound to evaporate? Or is blockchain the revolution set to rewrite all the rules?
Before you cash out or go all in, get the inside scoop on understanding cryptocurrency bubbles. Learn what’s causing this volatility, if markets are destined for a big pop, and whether your coins can recover.
In this article, we analyze the bubble buzzwords, and chart past crashes that will equip you with expert tricks to weather the impending crypto storm.
So buckle up and hang on tight. This bubble breakdown will give you the insights and fortitude to thrive, no matter which way the cryptocurrency winds blow next.
Brief History of Crypto Bubbles
Cryptocurrencies are notorious for their dramatic rises and falls, with Bitcoin leading the charge in creating both frenzied bubbles and devastating bursts within the crypto market.
Looking back at the short but volatile history of Bitcoin and other major cryptocurrencies, distinct bubble patterns emerge.
For example, Bitcoin had its first significant bubble in 2013, reaching a peak of over $1,000 in November after starting the year around $13. Mainstream media attention drove prices upwards as exchanges and users jumped on the bandwagon.
The bubble soon burst, with Bitcoin crashing in 2014 to around $300. This represented an almost 80% price drop, leading many to pronounce Bitcoin dead.
Similarly, after hovering around $1,000 per Bitcoin in early 2017, prices accelerated rapidly as crypto enthusiasm exploded. By December 2017 Bitcoin had soared to almost $20,000 per coin, bringing other cryptocurrencies like Ethereum along for the ride.
This bubble was driven by hype cycles, fears of missing out, and retail investors pouring savings into cryptos hoping to strike it rich.
Unsurprisingly the 2017 bubble could not be sustained. After peaking around Christmas, Bitcoin prices crashed over 2018. By December 2018 Bitcoin was trading below $4,000 per coin – almost 80% down from its peak.
The broader crypto market followed a similar trajectory, shedding billions in total market capitalization. The crash led to a “crypto winter” and questions about the future viability of cryptocurrencies.
4 Signs of Cryptocurrency Bubble
In 2021 cryptocurrency prices exploded once more, taking Bitcoin to new highs above $60,000 by April 2021. Signs that this was another bubble cycle include mainstream media and retail trading mania, celebrity promotions, scams, and inexperienced investors mortgaging homes to buy crypto.
In recent months, Bitcoin experienced a prolonged price rally throughout the month of January, marking one of the longest consecutive winning stretches for the cryptocurrency over the past 6 years. This upward momentum spilled over to benefit prices across the broader digital asset markets.
However, analysis suggests that this surge was not fueled by high trading volumes or liquidity.
Essentially, speculative mania and hype cycles around overvalued assets. This latest cryptocurrency run-up also comes on the heels of the FTX crash due to its bankruptcy in November 2022, which severely hampered liquidity across crypto markets industry-wide.
Since the start of 2023, Bitcoin has carved out substantial gains in a relatively short period. However, experts believe this rise has been built on an unsustainable foundation of low liquidity and speculative fervor rather than lasting traction.
It remains to be seen whether Bitcoin and other major cryptocurrencies can maintain altitude or if this tentative ascent was just the latest bubble destined to burst.
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4 Signs Of The Next Cryptocurrency Bubble Burst
1. Prices Lose Touch with Fundamentals
One warning sign a crypto bubble is forming and set to burst is when prices become drastically disconnected from underlying value fundamentals. Most cryptocurrencies don’t have clear valuation models like traditional assets, but experts suggest prices are in a bubble when coins trade far beyond reasonable adoption or utility.
2. Retail Trading Frenzy
Cryptocurrency bubbles are often fueled by hype-driven retail investing mania. Warning signs include friends, family, and neighbors talking about crypto, mainstream media hype, celebrity promotions, and inexperienced investors taking on massive exposure. Previous burst bubbles were marked by the general public piling into coins near the peak.
3. Scams and Fraud ProLiferation
The cryptocurrency Wild West lends itself to scams that reach a peak during bubble cycles. The next burst may be preceded by rising instances of fraud, questionable ICOs, fake celebrity endorsements, pump-and-dump schemes, and shady exchanges – indicating hype has gone too far.
4. Technical Analysis Flashing Warning Signs
While crypto markets are extremely difficult to model and predict, technical analysis can identify indicators of impending corrections.
Warning signs include a high Relative Strength Index (RSI), slowing price momentum, rising volatility, and violated support levels. Sophisticated crypto investors closely watch these signals for signs of trouble brewing.
What Happens After The Burst?
So a cryptocurrency bubble has popped and prices come crashing down, now what? Based on past bubbles like in 2018 and 2021, some typical aftermaths include:
Prices Bottom Out
After a major correction, cryptocurrency prices tend to continue dropping for some time as people panic sell and losses compound. For example, Bitcoin bottomed out around 80% below its peak in 2018 before stabilization kicked in.
Crypto Winter Sets In
The bubble aftermath is often referred to as “crypto winter” – a period of sustained bearish sentiment, decreasing interest, and limited price gains. Volume and trading activity dry up as investors turn away from crypto. This can last over a year after major crashes.
Projects Shutter Operations
The fallout hits hard. Many cryptocurrency projects, companies, and exchanges cannot survive the depressed business environment post-crash and close-up shop. In 2018, over 800 crypto ventures shuttered following the bubble burst.
Underlying Development Continues
Behind the scenes, development continues on building blockchain infrastructure, networks, and innovative crypto applications – even amid lower prices. The underlying technological value persists regardless of market conditions.
Market Consolidates and Recovers
Crashes wipe out speculators but the strongest hands remain. As hype dissipates, the market consolidates around cryptos with staying power until prices stabilize and interest returns. Of course, the rollercoaster ride eventually heads upwards again with the next bubble building.
While the aftermath of a burst crypto bubble can be painful, history shows the market does recover in time. The key is planning ahead and only investing what you can afford to lose.
Also Read: The Role of AI to Identify Sustainable Crypto Breakouts
How to Survive the Crypto Bubble Burst
- Have a Game Plan in Place. Before investing, understand your risk tolerance and have a strategy for different scenarios. Set targets for taking profits on the way up and limit stop-losses on the way down.
- Maintain a Defensive Portfolio. Don’t overexpose yourself to crypto, and choose established coins with better fundamentals. Allocate only a responsible percentage of assets so you remain financially secure even with drops. As always, try not to go for unbacked crypto assets. Research shows that they cannot help to diversify portfolios.
- Keep an Eye on Warning Signals. Watch for signs like cooling technical indicators, positive news generating little market movement, and bubbles in DeFi platforms. React quickly rather than ignoring the writing on the wall.
- Mitigate Emotional Reactions Don’t panic sell. Bursts historically pass and markets recover. Have conviction in your investments and avoid fear-based moves you may regret long-term.
- Take Profits on the Way Up Nobody can time peaks perfectly. Scale out of positions when hitting goals, allowing you to capture gains while maintaining exposure for future volatility swings.
Also Read: Diversify Your Portfolio with Crypto Stocks: Here’s Why You Should
Conclusion
Cryptocurrency bubbles may be nerve-wracking, but they have become an expected phenomenon in the market’s short history. The surges produce life-changing gains, while the bursts create incredible losses. But bubbles come in cycles that see crypto eventually regain steam.
The central question becomes whether this is a sustainable, albeit turbulent, trajectory for cryptocurrencies or a house of cards bound to fully collapse.
History suggests cryptocurrencies are resilient despite their volatility. Blockchain as a technology and crypto coins like Bitcoin withstand repeated booms and busts while continuing advancement in fits and starts.
Still, the modern markets remain in uncharted territory. The scale and frequency of recent bubbles breed uncertainty.
By understanding the causes of cryptocurrency bubbles, recognizing warning signs of impending bursts, acknowledging these patterns will likely persist, and strategizing to navigate the manias and crashes, investors give themselves the best chance of coming out ahead when the winds shift suddenly.
Cryptocurrencies offer an opportunity worth chasing for many, but only with full knowledge of the turbulence these assets often provoke. Buckle up and brace yourself if you decide to pursue the ride – bubbles will likely continue to blow and pop in crypto’s foreseeable future.
