Are We In A Crypto Bubble?
What is a crypto bubble and how do you know if you're in one? We're looking at what crypto bubbles are, why they happen, and whether we're in one in 2024. 🫧
What is a crypto bubble?
A crypto bubble occurs when the prices of cryptocurrencies like Bitcoin rise rapidly due to excitement and speculation, rather than because of the actual value of the underlying technology. Imagine a balloon being inflated more and more until it can't hold any more air and suddenly bursts. In the same way, crypto prices can soar due to hype and investment, only to plummet when the market corrects itself.
Read next: Is Crypto Dead?
Why do crypto bubbles happen?
Several factors help in creating crypto bubbles:
New investors: Stories of huge profits entice many to invest in cryptocurrencies, hoping to strike it rich quickly. This influx of new money drives prices up.
Fear of missing out (FOMO): The fear of missing out on potential gains pushes even more people to buy in, further inflating prices.
Media hype: Constant media coverage of rising crypto prices fuels the frenzy, attracting more investors.
Bandwagon effect: Seeing others invest makes people feel they should too, even if prices are already high.
Read next: Is Crypto a Good Investment?
A timeline of crypto bubbles
There have been several significant crypto bubbles before:
2011
February 2011: Bitcoin's price rises to $1.06, driven by early interest and speculation. However, by April, the price falls to $0.67 as the initial excitement wanes.
June 2011: Bitcoin surges to $29.58 following a Gawker article about the dark web market Silk Road, highlighting Bitcoin's use in online transactions. This leads to increased media attention and investor interest. By November, the price crashes to $2.14, reflecting the volatility and speculative nature of the market.
2015
November 2013: Bitcoin's price reaches $1,127.45, fueled by growing mainstream awareness and speculation. This period sees significant media coverage and increased adoption.
2014-2015: Over the next year, Bitcoin's price gradually declined, hitting a low of $172.15 in January 2015. This decline is attributed to regulatory concerns, security issues, and market corrections.
2018
2017: Bitcoin experiences an unprecedented boom, with prices skyrocketing to nearly $20,000 by December. The surge is driven by widespread media coverage, institutional interest, and the rise of Initial Coin Offerings (ICOs).
2018: The bubble bursts in early 2018. By January, the price begins to fall sharply, and by December, Bitcoin is trading around $3,000. This crash is exacerbated by regulatory crackdowns, ICO failures, and security breaches.
2022
January 2021: Bitcoin hits a high of $34,792.47 but crashes by 17% the next day.
April 2021: Coinbase goes public, and Bitcoin reaches $64,000. However, Bitcoin falls below $49,000 by late April, indicating high volatility.
May 2021: The market experiences a significant crash. Bitcoin drops to $31,000, Ethereum falls by 40%, and Dogecoin drops by 45%. The crash is partly triggered by Elon Musk's announcement that Tesla will not accept Bitcoin payments and China's reiteration that digital currencies cannot be used for payments.
November 2021: Bitcoin reaches an all-time high of $67,566.83, but the market starts to fall again towards the end of the year.
June 2022: The market faces another major crash. Bitcoin falls to nearly $22,500, Ethereum to $1,200, and major exchanges like Celsius Network halt withdrawals, causing panic and further declines.
November 2022: FTX, a major crypto exchange, collapses following a liquidity crisis and allegations of fraud, further shaking investor confidence.
2023: Several crypto-related companies file for bankruptcy or face significant financial distress, including Genesis and Terraform. Regulatory pressures increase, leading to a more cautious investment environment.
Read next: What happened to FTX?
How can you tell if there’s a crypto bubble?
There are a few key indicators that may suggest a crypto bubble:
Quick price increase: Prices of cryptocurrencies rise very fast without substantial reasons.
High volatility: Prices change dramatically in short periods.
Big trading volumes: Sudden increases in buying and selling can signal a bubble.
Fear and Greed Index: High readings suggest the market is driven by emotions rather than fundamentals.
Increased margin trading: More trading with borrowed money can amplify market movements.
Read next: What's the Fear and Greed Index?
Are we in a crypto bubble in 2024?
Given Bitcoin hit a historic high of more than $73,000 in 2024, you might be wondering if we’re in a crypto bubble in 2024. As of yet, it’s not clear to tell. While the crypto market certainly appears to be on a bull run and prices remain volatile, many of the other indicators, like a rush of investors or sudden price jumps are lacking.
Read next: Crypto bull market strategies
How to handle a crypto bubble?
We’ve got you covered for each stage of a crypto bubble with some tips on how to reduce your investment risk.
During a crypto bubble
Diversify investments: Spread your investments across multiple cryptocurrencies to reduce risk.
Watch market trends: Use tools like the Fear and Greed Index to understand market sentiment.
Stay disciplined: Stick to your investment plan and avoid making impulsive decisions.
Monitor market sentiment: Keep track of indicators like the Fear and Greed Index.
Implement stop-loss orders: Automatically sell your assets if prices fall below a certain level to limit losses.
Prepare for market crashes: Have a plan in place to handle potential downturns calmly and effectively.
After the bubble bursts
Assess and rebalance your portfolio: Review your investments and adjust to reduce risk or take advantage of new opportunities.
Learn from experience: Analyze what went wrong and use that knowledge for future investments.
Keep an eye on the market: Look for opportunities to buy quality cryptocurrencies at lower prices, but always do your research.
Read next: Crypto bear market strategies
Don’t forget your taxes
Your crypto is taxable - and failing to pay any tax due on gains from crypto or income from crypto is as much of an offense as any other tax avoidance. Learn more in our crypto tax guides and sign up to Koinly free today to help you calculate your crypto taxes easily and quickly.
