Good investment or not?: The telltale signs of the crypto bubble

The perception around cryptocurrency shifts as it becomes widely adapted worldwide. Once dismissed as a passing trend, it’s now seen by many as the future of finance. However, not all digital assets like Bitcoin (BTC) are safe investments. Beware of crypto bubbles by understanding them and knowing the telltale signs. 

Key takeaways:

• A crypto bubble refers to a digital asset whose value is inflated and unsustainable. 
• The elements causing a crypto bubble are not found in safer investments like Bitcoin (BTC), Ethereum (ETH), or Ripple (XRP). Beware of the commodity that is swayed too easily by community panic.
• The best way to spot a crypto bubble is by paying attention to market trends. Opt out if it’s being traded too fast and the price spike is too volatile.

What to know about crypto bubble

The best way to answer the question ‘What is crypto bubble?’ is to define the word ‘bubble’ in the context of finance. A bubble occurs when an asset is oversold and overpriced compared to its intrinsic value. The market for this asset can suddenly crash when people realise its true worth and start selling out while the price is high. 

The term ‘bubble’ is fitting because it can inflate and then burst, leading to an abrupt end to the crypto market. It’s also an apt name because the bigger the bubble, the more likely it is to burst. What differentiates it from a safer crypto investment is that its value is based on market sentiment rather than its intrinsic value. 

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The elements affecting a crypto bubble

It’s easier to predict market trends once you identify that an investment is a bubble crypto. The following elements will affect its price hike and crash, giving you an indicator of when to opt out:

Market speculation and hype

Crypto bubbles are highly speculative so most services like Gamdom don’t accept them. If you have some on hand, then you can at least capitalise on its price increases by following the news. Keep an eye on online forums and blog posts about the asset from various sources. Expect to see bigger price changes the more people join the discussion. 

Fear of missing out (FOMO)

Everybody is hoping to find another asset that will become just as lucrative as Bitcoin (BTC) and Ethereum (ETH). Hence, initial coin offerings (ICO) are a common promotion for upstart crypto projects. 

People wish to invest in assets while they are still cheap and believe in the promise that these will become more valuable in the future. This results in over-buying that turns many projects into crypto bubbles. 

Media influence and public perception

Bubble crypto is easier to manipulate the further its price is from its intrinsic value. So much so that a celebrity can promote the asset and it can shift market trends into their favour. Influencers can catch this trend and support their claim, potentially amplifying the bubble. This artificially drives demand for the crypto and it will crash unless the intrinsic value can catch up. 

Lack of regulation

Many investors oppose regulation on commodities because it mutes volatility. That’s bad for short-term traders but it’s the ideal solution for long-term investors. Bad actors can manipulate the market and public perception of an unregulated asset. They can decide when to burst a blockchain bubble, leaving traders who took a risk with critical financial losses. 

Liquidity and trading volume

Creating more outlets to buy and sell assets will increase their liquidity. In doing so, trade volume can rise as long as the demand is high. However, cryptocurrency bubbles cannot keep up with increasing selling pressure. High trading volume will cause it to burst and cause a sharp downward market trend.

Signs that a bubble could burst

If you find yourself in a tricky situation of investing in a crypto bubble, you should at least avoid critical losses. Pay attention to your portfolio and act fast when you see the following signs that a crypto bubble is about to burst:

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Excessive price hikes in a short period

Crypto prices take sharp turns but only when there’s a big shift in the overall crypto market. A good example is when exchange-traded funds (ETF) offerings for Bitcoin spot trading were offered. The price changes were high but took weeks of consistency in one direction. This trend can reverse and plunge as deep as it rose but market prices should plateau at some point. 

Hence, you should be alarmed to see rapid shifts in market prices in a matter of days. Cash out as soon as you can to avoid major losses when you notice erratic market trends. 

Too much public attention

Sometimes, a crypto with potential becomes a bubble when it gets too much attention. This happens when the asset draws the attention of public entities, especially non-expert investors but proceeds to promote it so they can sell the ones they’re hodling. Their followers can be inexperienced traders who end up overbuying the asset and inflating its bubble. 

A notable example of this was the Bitcoin bubble in 2017. It was a functional crypto for small payments when it started gaining traction around 2011 and 2012. The attention reached mainstream media and resulted in a big price hike, pushing Bitcoin prices to more than $19,000 in 2017. The asset’s intrinsic value wasn’t high then so it dropped towards 2018. 

What saved Bitcoin from bursting is being adopted by Tesla and Coinbase, leading to its resurgence in 2021. Other crypto assets aren’t as lucky so it’s better to just opt out when it’s gaining too much public attention. 

The rapid increase of newbie investors 

New investors join crypto bubbles without fully understanding its economy because they’re driven by FOMO or influencers’ promotional content. When this happens, it’s usually instigated by traders looking to exit. If a surge of new users joins the blockchain’s ecosystem, take their demands for supply as an opportunity to sell your assets. 

Unrealistic market predictions

One of the key strategies online influencers use to promote their assets for sale is to deliver promises of incremental value. These are often based on statistics but sometimes exaggerated in blogs to sound more appealing and the call-to-action statements become more compelling. 

The rule of thumb is ‘if it’s too good to be true, it probably is’. Beware of online sources offering overly optimistic predictions of price trends in the next 1 to 10 years. Always look deeper into their content to read their evidence. Decide for yourself if what they say is plausible and opt out if you detect too many readings are exaggerated.

Irrational trading activities in the market

Every trader is expected to know or be aware of fundamental indicators in trading. Disregarding this factor should be seen as a worrying sign that their crypto investment can be misguided. It’s within expectations for newcomers to be confused or easily swayed by market trends. If they make up the majority of the crypto market, you might see excessive trend shifts.

Irrational exuberance is caused by panic in the market. It happens because the market follows hype and FOMO more than analytical analysis. You should opt out once you conclude that the majority of the market is inexperienced traders. 

Prepare for the bubble burst to avoid critical losses

The best way to avoid losing too much in one crypto bubble burst is to steer clear of risky assets. If you can’t, you should at least be prepared to opt out at the first sign of trouble. However, sometimes, you’ll just be unlucky and get caught in a bubble bursting. Follow these tips if you want to avoid losing too much money in crypto bubbles as an investor:

• Diversify your portfolio: Invest in a wide range of crypto. Keep secure ones like Ethereum (ETH) and Ripple to balance your potential loss from lesser-known digital assets. 
• Take profits gradually: Pay attention to spot trading trends. Sell a little bit of the assets you hodl whenever the prices are favourable but don’t sell out all at once. This at least guarantees you have regular small profits over time before its bubble bursts. 
• Avoid FOMO: Never give in to social media fear-mongering. Always use your understanding of fundamental data analysis when making a financial decision. 
• Rebalance your portfolio regularly: Rebalancing the portfolio means reallocating funds between assets you’re investing in. Doing so concerning market trends means that you are always ahead of crashes. If the bubble bursts, you at least have other, more secure assets to fall back on. 
• Stay active on social media: Remember that trades and investors discuss their views of market trends online. You can join the discussion or lurk to gather data. Knowing what they’re talking about gives you the edge to predict what happens next. 

Crypto bubbles to watch out for are typically penny crypto or meme coins. Rather than selling them at an online market, you may swap them on some platforms. Turn them into assets you can use to bet on Gamdom like ETH or Tether (USDT) from ERC20 tokens. It’s a good exit strategy to always keep in mind to avoid major losses. 

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