Remember the dot-com bubble or the housing bubble? Something becomes famous and people start investing in it not caring about whether the investment or price rise makes any sense or not. The value of the item rises and then crashes spectacularly leaving people to deal with the losses.
Financial bubbles are not a new thing and even the crypto market is not immune from them. Wait, does this mean crypto is a bubble? Can Bitcoin be a bubble? There are people who believe that cryptocurrency itself is a big bubble waiting to burst. While there have been cases where cryptocurrencies such as the infamous TerraUSD and Luna have gone down to complete zero, Bitcoin almost always has managed to bounce back.
Only time will tell whether Bitcoin is the biggest bubble in history or not. Meanwhile, it is a good idea to familiarize yourself with the concept of the Bitcoin bubble if you’re planning to trade cryptocurrencies.
This article will answer all your questions such as What does Bitcoin bubble mean, Could BTC go to zero and what can you do to protect yourself from getting caught up in a Bitcoin bubble.
What Does Bitcoin Bubble Mean?
A Bitcoin bubble is a financial bubble situation that happens when a lot of people start buying Bitcoin hoping that its price will keep increasing and they will be able to profit off of it.
However, just like a bubble bursts after reaching a certain size, the Bitcoin bubble will also “burst” after prices rise to a certain point. The prices reach a high and then start falling. People then panic and start selling their cryptocurrency holdings causing the price to fall further.
This creates a cycle where people keep selling their assets and their price continues to go down until it reaches zero. This bubble situation is not unique to Bitcoin and can happen with any cryptocurrency. While Bitcoin has seen some dramatic rises and falls in its value, there has never been a situation where BTC prices have reached near zero.
What are the Signs of a Crypto Bubble?
Now, the question that arises is, how do you identify an impending crypto bubble? How to decide whether you should steer clear of a crypto project or not? The truth is that identifying a crypto bubble can be difficult. It can be tough to differentiate between a genuine upcoming project and a hype-based bubble that is just waiting to burst.
Still, there are certain signs that you can look out for while evaluating a crypto project that will help you know whether to be skeptical of the project or not.
Rapid Increase in Price
Whenever you witness a sudden and rapid rise in the prices of a cryptocurrency, it often means that that particular coin may be overvalued. Here, you can follow the price of that cryptocurrency and if you notice that it keeps increasing without any significant development or technological advancement to back it, it may be a sign that a bubble is forming.
Social Media Hype
Social media is big on trends. It is a hype machine that builds up a particular coin as the “next big thing” but then is quick to move on to something else which is then touted as the next upcoming star. People are quick to get on the hype train and start buying a coin without researching its real value. This can create a bubble that bursts as fast as it forms.
Market Saturation
This one sort of relates to the previous point about social media hype. It is also a bit trickier as it is not really a bad sign that people are interested in something. But yeah, if you suddenly start seeing people who’ve never even been interested in cryptocurrency heavily trading a particular coin, it is time to take a step back.
Get a general idea of the crowd involved in the trading of that particular. If you see lots of inexperienced people with relatively little knowledge of the market investing in that coin, it means that a crypto bubble may be forming.
Overvaluation of a Cryptocurrency
A cryptocurrency’s market capitalization is the total value of all the coins in circulation. It is a product of the current price of the coin and the total number of coins in circulation.
If you notice that a particular cryptocurrency’s market capitalization has suddenly started rising to very high levels, it is a sign that the crypto’s valuation is heavily inflated. This is often accompanied by a distinct lack of increase in use cases or real users which more often than not points towards a crypto bubble situation
What are Some Examples of Crypto Bubbles?
The 2017 ICO Bubble
Initial Coin Offerings(ICOs) are used by startups and creators to raise funds by selling their newly launched crypto coins to investors. In 2017, several new coins were introduced via ICOs. Investors bought into them hoping to make gains similar to those of early Bitcoin and Ethereum adopters.
During this time, a number of ICOs were launched many of them without any real product or service backing them. A lot of such projects later turned out to be scams. The lack of controls and disclosures in the crypto world only exacerbated the situation and many investors ended up losing their money.
The 2018 Altcoin Bubble
Any cryptocurrency that is not Bitcoin is called an altcoin. Everything from Ethereum(ETH), Cardano(ADA) and Litecoin(LTC) are examples of altcoins. At the start of 2018, many altcoins started gaining hype and their prices started rising without anything solid to back them.
The prices of these altcoins, however, started waning by July 2018 and significantly lost their value by December 2018. For example, ETH reached a high of $1,000 in January 2018 but fell to less than $150 in December of the same year. Investors who put their money in all these altcoins during the hype period ended up losing a significant chunk of their money.
The 2022 Terra-Luna Collapse
TerraUSD(UST) is a stablecoin i.e. a cryptocurrency pegged to the US Dollar. Luna is the primary asset backing Terra and is used as a governance token for the Terra blockchain. In May 2022, UST started to break its peg to the USD. In a period of one week, UST plunged to a mere 10 cents and Luna fell to “virtually zero” as holders used the mint-and-burn system to convert Terra to Luna which increased the supply of Luna and crashed its price.
This incident wiped out nearly $45 billion of market capitalization in a week. The devalued UST was then abandoned and a new Luna cryptocurrency was issued. But even the new Luna crypto lost valuation within days of being listed on crypto exchanges.
Will Bitcoin Crash to Zero?
Bitcoin is known for its unpredictability and volatility. It has seen some dramatic changes in its price since it was publicly launched in 2009. For example, Bitcoin reached a high of nearly $20,000 in December 2017 and just a year later towards the end of 2018, its price had fallen to $5,500.
Bitcoin, like any other cryptocurrency, is just as vulnerable to unpredictable highs and lows. You can never really anticipate what’s going to happen in the next moment so yes, Bitcoin can crash to zero.
But here you need to remember that Bitcoin is also the cryptocurrency. It is the thing that started the crypto craze. Therefore, if there is one cryptocurrency whose foundational strength you can be sure of, it is Bitcoin. It is the most popular crypto and breaking down its network and the possibility of it losing all of its value is very low.
While we don’t know how future events will impact Bitcoin, we can say that given its popularity in the present, a total crash in Bitcoin’s value is highly unlikely.
What Do I Do in a Crypto Bubble?
Crypto bubbles are not a new thing and with new cryptocurrencies coming up every other day, their frequency is likely to increase. Therefore, it is important to know what you can do in a crypto bubble situation.
Try to Reduce Exposure to that Particular Cryptocurrency
You can reduce your exposure to a particular cryptocurrency by selling it off if you suspect that a bubble is forming. You would be able to sell your crypto at a decent if not the best price and reduce the possibility of loss.
However, if the bubble has already burst, all you can do is get rid of the coin to make the best of the situation or hold on to the coin if you believe it has the potential to regain its value.
Stay Updated on the Latest Market Happenings
Keeping abreast of the latest developments in the crypto market and staying informed about the price trends and regulatory changes is the best bet you have to spot a developing crypto bubble. Being aware of the latest market news will help you plan better for getting out of a bubble with minimal loss.
Seek Expert Advice
It is a good idea, in general, to get advice from experienced traders and financial advisors to gain more insight into the crypto market and the market cycle. They will be able to guide you better on how to navigate and get out of a crypto bubble while minimizing your losses.
Plan for the Long-Term
The last thing you want to do is buy into the panic and end up with far more losses than the amount you ever invested. Hence, plan for the long-term with your cryptocurrencies.
Study thoroughly about cryptocurrencies, different coins and tokens and the basics of crypto trading. This will help you develop a balanced approach while charting through rapid market changes.
Conclusion
Cryptocurrency bubbles are not as rare as one thinks and if you are not careful, you may end up getting caught in one. While crypto bubbles can be difficult to identify, there are certain signs that you can look out for including sudden and significant rises in prices so that you steer clear of them.
However, this does not mean that a major increase in every cryptocurrency’s value is a sign of a crypto bubble. There are some steps you can take to reduce your losses in a crypto bubble situation but it is always a good idea to consult with a financial expert to get better insight into crypto market trends and crypto trading.