A "bubble" is the buying and selling of any asset in the market at a price that is significantly higher than its actual value. It is a term used to describe when any tradeable asset is bought and sold at a price that is significantly higher than the price determined by various metrics. When a large number of people become interested in an asset, its value can rise. A bubble is also defined as trading assets with excessively inflated values. Bubbles continue to grow until a large amount of investment is noticed, which can lead to an economic downturn.

The term "bubble" is commonly used in the financial industry. To call an asset a bubble, its true value must be known, and transactions must take place at a price higher than that value. Bubbles can form around a variety of market assets, including stocks and currencies. Expert and analyst opinions on whether an asset is a bubble or not can help investors evaluate any investment.

Bubbles can be classified into five different types:

• Market bubbles
• Price bubbles
• Speculative bubbles
• Speculation mania
• Real estate bubbles

How do Bubbles Form?

The fundamental reason for the formation of bubbles is human psychology. Bubbles arise as a result of herd mentality. Bubbles are frequently encountered in crypto assets that have a high and unlimited supply. In such crypto assets, there is a possibility of an increase in value due to speculation. Prices increase as a result of purchase transactions by individuals seeking to benefit from the price increase, and the bubble continues to inflate. Eventually, a whale (a large seller) performs a significant sell-off, and prices suddenly drop. From that point, the increase turns around, panic sales begin, and the bubble bursts.

Are Cryptocurrencies Bubble?

Some economists have claimed that cryptocurrencies are bubbles, traded at prices much higher than their actual value. Others have argued that the advantages and uses of cryptocurrencies should be taken into account and that they are not bubbles.

The idea that cryptocurrencies are a bubble is based on the belief that the sole purpose of these assets is speculation, but over time, real use cases for crypto assets have begun to emerge. Most crypto assets are used as a means of payment. .

What Are Some Important Historical Examples of Bubbles?

Crypto assets are seen as an important investment option. Crypto asset units may include speculative movements, price volatility, and bubbles. Some examples of bubbles that have occurred in crypto asset units in the past are as follows:

• Tulip Mania
• South Sea Bubble
• Dot-com Bubble

Tulip Mania

The event that emerged as the first bubble example in the world took place in Holland in the 17th century. The sudden rise and rapid fall in tulip bulb prices became known as tulip mania in history.

South Sea Bubble

The South Sea Bubble occurred in England in the 1720s. It was an example of a bubble that occurred as a result of the stock prices of a company called the "South Sea Company" rising too much. It is also known as the first stock market bubble.

Dot-com Bubble

The Dot-com bubble refers to a significant increase in the stock prices of technology companies and the subsequent major collapse that occurred in the late 1990s and early 2000s. Technological developments accelerated in the 1990s, and with the commercialization of the Internet, interest in the sector and capital inflows increased. Between 1995 and 2000, the bubble expanded and many people began to open Internet companies. The established companies received considerable attention, and investors invested in many companies with the suffix ".com." Even companies that did not yet have a product went public, and their stock prices increased three or four times in a short period of time. All of this led to stock prices being greatly inflated. On March 10, 2000, NASDAQ achieved a market value of $5 trillion. At its peak, some companies began selling large amounts of shares, causing panic sales among investors and causing the bubble to burst. On September 27, 2002, the total market value fell to nearly $1.2 trillion, its lowest level.