What are Crypto Bubbles and How to Spot Them

by Sandip Das from
What are Crypto Bubbles and How to Spot Them

If you want to avoid crypto market crashes, you need to get familiar with what are crypto bubbles and how to spot them. In a crypto bubble the prices of cryptocurrencies go up so high in a short period that no economic reason can justify them. Eventually, the market price crashes down and many investors (especially the late entrants) lose almost their entire investment.

In March 2020, the valuation of the entire crypto market was barely $150 billion. In little more than a year, the total crypto market soared by 16x to reach a whopping $2.5 trillion in May 2021. By November of that year, the crypto market’s total valuation reached the stratospheric height of $3 trillion. Many altcoins, for example, Dogecoin, went up by 10,000-15,000% in a matter of months.

And just when many investors were caught in mass hysteria and the market sentiment was too optimistic, the crypto market started crashing. By June 2022, the valuation reached a tad above $900 billion - wiping out $2 trillion from its market capitalization. This was the crypto crash of 2022. This is how crypto market bubbles behave. Knowing about market bubbles will help you avoid the next one!

In this crypto bubbles guide for beginners, we are going to explain the meaning, significance, history, and factors behind market bubbles. In addition, in this post you are going to find several answers related to Bitcoin crash, crypto collapse 2022, Bitcoin collapse 2022, “is Bitcoin going to crash?” or “is crypto crashing?”. Also, we are going to tell you how to identify a crypto market bubble, avoid it, and survive market bubbles.

1. First of all, What is a Crypto Market Bubble?

A crypto market bubble is a crypto market phenomenon in which prices rise to astronomic heights in a short period, defying all investment logic. In a bubble, the prices of cryptos are driven by extremely positive market sentiment, investor frenzy, FOMO (fear of missing out), high liquidity in the market, and speculation.

When a crypto bubble takes place, many investors just get sucked into the positive market sentiment. Everybody believes that the market price is going to go up forever. However, eventually, there needs to be new buyers to sustain the price rise. Now when everyone has already invested, who is going to buy and support the price higher?

This is when profit booking starts and the market begins to crash down. Bubbles are always followed by a sudden crash landing. When the price starts declining rapidly, most investors get panicked, and everyone starts to wonder, for instance, “why Bitcoin is going down”. This leads to panic selling. When optimism leads to panic, the market price starts coming down rapidly. This is exactly what happened during the 2022 crypto crash. In the 2022 crypto collapse, many cryptos lost 80-90% of their value.

Crypto market bubbles or stock bubbles are not a one-time phenomenon. They come and go in cycles. Also, a bubble typically has different phases. An initial price rise leads to confidence and belief. As more people start investing, the price levels start going up rapidly.

More people join the party and prices go up even faster. Extremely positive news spread by influencers, TV channels, and speculators adds fuel to the fire. Ultimately, everyone starts believing that prices will continue to go up forever.

However, when there is no new buyer to sustain the high price, the market starts crashing down. So, bubbles are followed by crashes, and then crashes are followed by new bubbles again after some time. This cycle keeps repeating, as we have observed in the case of stock market bubbles.

2. When Does a Crypto Market Bubble Take Place?

A market bubble generally takes place towards the end of a crypto bull market. At the beginning of the bull market, the price rise is typically slow and steady. However, when investors become more confident, they may put in more money. To know more about the crypto bull and bear markets, click on the link to read our detailed guide.

Also, a steady price rise may attract new investors to the market. This is when the market price starts to grow by leaps and bounds. Ultimately, prices reach such a high level that they become unsustainable. This is the bubble phase. In the next phases, prices start crashing down heavily, leading to severe investment losses for many investors, especially the ones who bought cryptos at extremely high prices.

3. A brief History of Crypto Market Bubbles

The crypto market is relatively new. It basically started in 2009 with the introduction of Bitcoin. Since its beginning, the global crypto market has undergone at least 3 major crypto bubbles:
  • Bitcoin Bubbleof 2013
  • Crypto Bubble of 2017-18
  • Crypto Bubble of 2020-21

In all these crypto market bubbles, a common feature was that the market price rose rapidly to an unbelievable level, followed by a crypto market crash. At the height of these bubbles, the prices of many cryptos rose by thousands of percent before losing 80-90% of their value. We also saw Bitcoin falling over 70% in this crypto crash.

For example, when the 2013 crypto bubble was forming, BTC’s price rapidly soared from $216.18 to $1,129.43 in just one month, generating a jaw-dropping return of about 450% in November of that year. In the next few months, we witnessed a severe BTC crash.

By February 2014, Bitcoin crashed to around $110 - losing about 90% of its value. At this point, many people were asking, “why is Bitcoin falling” or “why did Bitcoin crash” or even “Is Bitcoin done?”. After the severe crash, many were wondering “when the crypto market will go up again?” By the way, if you want to know what is Bitcoin and how it works, you can read our related article completely devoted to this topic.

4. Factors Behind Crypto Market Bubbles

Crypto market bubbles happen in cycles. However, each time there can be a new contributing factor or a combination of factors. Let’s look at some of the general factors leading to crypto market bubbles:

4.1 FOMO

Have you ever missed a party and then felt miserable about all the fun that you may have missed? If crypto investing is a party, FOMO or the fear of missing out plays a great role in creating bubbles. When the market price goes up, many investors don't want to miss an opportunity. So they start jumping in, which can create market bubbles.

4.2 Speculation

In speculation, people invest in an asset with questionable fundamentals, expecting an excellent return. Cryptos have no intrinsic value as they are not tied to any real asset. However, when many investors speculate that the price of a particular crypto can go up significantly, they start heavily investing in it. This leads to bubbles. For example, Dogecoin’s meteoric price rise in 2020 and 2021 was mainly because of extreme speculation.

4.3 Liquidity

When there is too much money in the market, a part of it ends up in the crypto market. This can lead to asset price bubbles. For example, central banks were printing too much money to stimulate the economy at the onset of the recent pandemic. This extra liquidity was one of the main factors behind the crypto price bubble in 2020-21.

4.4 Introduction of a new asset class

Whenever there is a new asset class or an innovative technology, many people speculate about its rapid price rise. This expectation can attract huge initial investment, which can form market bubbles. This explains the Bitcoin bubble of 2013 when Bitcoin was a completely new investing asset or technology. In 2021, the NFT bubble took place because NFTs, or Non-fungible tokens, were recently introduced as a new asset class.

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In addition to the above, there are other factors like positive sentiment, greed, positive opinions by influencers, etc. which may lead to crypto bubbles. It is vital for crypto investors to be able to recognize them as well if they want to choose right cryptocurrency for crypto portfolio.

5. How to Identify Crypto Bubbles

The bad thing about crypto market bubbles is that they lead to big-time crashes. So, you must do your best to identify crypto bubbles and avoid those. Here are some of the signs of a crypto bubble getting formed:

  • There is an unusual price rise of crypto or the entire crypto market in a short period.
  • Crypto prices are going up by leaps and bounds without any solid fundamental or economic reason.
  • The price rise is not backed by technological innovation regulatory impact or any major case of adoption.
  • The crypto market rally is driven mainly by retail investors with minimal participation by institutional investors (remember that institutional investors take a more cautious investing approach).
  • There is too much positive media coverage about market prices going up. When there is too much positivity in the market, it’s time to be cautious.
  • Everyone around you thinks that the prices will continue to go up in the future.

When the market shows any of the above signs, it’s time to invest with caution. It’s always better to follow a well-structured crypto trading strategy to exit the market at the right time, or follow a strict stop-loss at this euphoric moment.

6. When Will the Next Crypto Market Bubble Take Place?

What we know about the crypto market bubbles is that they occur in cycles. What we don't know is exactly when the next crypto bubble will take place. Historically, the major crypto market bubbles have taken place in the intervals of 3-4 years.

So, going by this rate, the next bubble may form in 2024-25. However, there is absolutely no sure-shot way of predicting the next market bubble. Also, bubbles are often identified retrospectively when they have already gone bust.

The global crypto market had a severe bear phase in 2022. From the beginning of 2023, the global crypto market has started consolidating with a positive bias. Many experts expect cryptos to explode in 2024, so, currently, this looks like the beginning of another bull run or a rising crypto market. Crypto bubbles typically take place towards the end of a bull run, when even the last investor has invested.

Therefore, the best idea is to enter the market in the early phase of the bull run and book profit when prices have gone up significantly. When the market reaches a euphoric stage, it’s better not to make fresh investments, as the crypto market may have entered the bubble territory.

7. Surviving and Thriving in a Crypto Bubble

The best way to survive a crypto market bubble is not to invest when the market price has already gone up tremendously. The best time to start investing is when the market starts consolidating after a bear phase.

Once the market has moved up significantly, and you have achieved your investment targets, it’s better to start selling gradually and exit the market before it heats up. It’s common for many investors to earn money in the bull phase and then lose it all when the market goes bust. You must avoid it.

So, if you want to come out with your gains intact, you should either start selling when your target has been achieved or use a strict stop-loss policy so that you don't lose your gains.

7.1 Dos and Don'ts of Dealing with Crypto Market Bubbles

To sum up, if you want to survive and even thrive during the future crypto bubble, we suggest to carefully read these points and incorporate them into your crypto strategy:

  • Never make a fresh investment when there is a marker euphoria.
  • Never invest based on tips received on social media.
  • Make a gradual exit when your profit target has been achieved.
  • When there is an extremely positive sentiment in the market, take a cautious approach.
  • Don't fall into the FOMO tarp. You don't need to invest just because your friends/relatives/neighbors are doing so.
  • Conduct your own thorough research before investing in any crypto asset. You can use various market analysis tools to gather information and conduct your research on cryptos.
  • Use a strict stop loss to protect your gains.
  • Look at cryptocurrency price charts to devise effective entry and exit strategies.
  • Never put all your money in a single crypto. Build a diversified portfolio by selecting 10-20 crypto assets from different domains.

It is also very important to remember about one more thing - always choose only the best crypto exchanges. It is very important factor if you decide to purchase your crypto, so please familiarize yourself with the list of the best decentralized and centralized crypto exchanges in 2024.

8. Conclusion

Crypto market bubbles are a common phenomenon in crypto investing. Bubbles are followed by severe crypto market crashes. However, you must put your best efforts to avoid market bubbles.

If you want to stay away from these crypto market bubbles, never invest in the euphoric stage of the market. In addition, don't fall prey to FOMO, investor frenzy, and extreme positive sentiments. Moreover, listen to the old advice of never putting all your eggs in a single basket. Diversification can help you protect your capital.

9. What are Crypto Bubbles and How to Spot Them: FAQs

9.1 What is a bubble in cryptocurrency?

In a crypto bubble, prices of cryptos rise exponentially without any solid fundamental reason. A typical crypto bubble is followed by a crypto currency crash.

9.2 What can predict bubbles in cryptocurrency prices?

It’s hard to accurately predict market bubbles. However, you can identify cryptobubbles from some common features like extreme euphoria, parabolic price rise, and a high level of positive market sentiment.

9.3 What is crypto volatility?

Crypto volatility is the tendency of crypto prices to make large movements in a short period. Crypto is a much more volatile asset compared to, for instance, stocks or bonds.

9.4 What is the next Bitcoin?

It’s hard to predict the next crypto that can replace Bitcoin. There are many potential candidates like Ethereum (ETH) or Solana (SOL) which can provide the same utilities and much more.

9.5 How to find the best cryptos to invest in 2024?

You can research the leading cryptos using best crypto analysis tools or top crypto data aggregators.

9.6 How to avoid crypto market bubbles?

The best way to avoid crypto bubbles is to stay away from the market at the euphoric stage. Also, don't fall prey to FOMO and investor frenzy. This post on what are crypto bubbles and how to spot them contains several tips and strategies on how to avoid crypto market bubbles.

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