Do you know what a financial bubble is?
A financial bubble happens when assets (such as stocks, bitcoins, or, in the example above, mortgage loans) start to trade at prices far above their true value. That is when there is a distorted view of the value of these assets.
The name bubble comes from the instability of this process. As it is entirely based on speculation, it only takes something small for the bubble to “burst,” causing a brutal and rapid fall in values and leaving investors with a high loss. A burst bubble can lead to serious economic consequences depending on the severity. The subprime case caused a deep crisis between 2007 and 2008 and impacted countries worldwide. Later, we will explain how much does a bubble cost?
How does a bubble form?
The main characteristic of a bubble is the rapid growth in the market value of an asset (or a group of assets), but it isn’t easy to point out exactly what causes this rise. What feeds the bubble, however, is typically herd behavior: investors who are attracted by the asset’s popularity and start trading it – consequently increasing its popularity even further.
The logic is simple: by the law of supply and demand, when more people look for a product, the market value increases. The problem, in the case of the bubble, is that this is based on speculation only.
How much does a bubble cost? The subprime crisis exposed how the lack of regulation fueled this situation. For various reasons, including low-interest rates, the US population was experiencing an intense time of mortgage loans. Banks pooled these loans as assets to be sold on the market.
These assets were considered excellent investments and became popular at an accelerated pace. As the market warmed up, interest rates rose again, and people started to stop paying their loans. Upon realizing the default, investors began to sell their assets uncontrolled, causing prices to plummet.
To make matters worse, it was discovered that within these “clusters” of real estate financing, there were mixed titles with extremely inflated value – the so-called “bad loans.” That is, the price attributed to them was much higher than their intrinsic value.
The stages of a bubble:
Bubbles usually go through a few common stages. According to the American economist Hyman P. Minsky, a specialist in financial crises, there are five main phases. The five stages of the financial bubble are:
- Displacement: The moment investors begin to notice (and become enchanted) a new paradigm in the market – an innovative technology, a new product, or an investment opportunity with apparently easy returns, for example.
- Boom: Prices start to rise – slowly at first, but quickly gaining momentum as more investors enter the market. The asset is gaining more and more attention, including in the press, fueling the attraction of investors and the feeling that those who put their money will miss the opportunity.
- Euphoria: in this phase, there is general optimism about the asset, and prices skyrocket. Most people don’t even question the soundness behind their investment.
- Profit: those who sell at high prices can make a lot of money. The problem is that very few people notice the first signs of the bubble and understand that it’s time to start selling before it bursts – most go on to the fifth and final phase.
- Panic: when they see the money going away, others rush to sell their assets, too, and prices fall even faster than they rose. Most investors end up with a huge loss.
How much does a bubble cost?
To answer, how much does a bubble cost? We have dispensed different arguments below. When you think about investing in cryptocurrency or other Blockchain technology, only you can decide if the risk is worth it. However, we follow a few rules about when and how to invest.
Absolute maximum = no purchases:
We never buy cryptocurrencies when they are at an all-time high price. This averts you from being the poor guy who buys Bitcoin for $20,000 and gets to $6,000 after panicking. We are convinced that every asset at the right price is worth buying.
Dollar-cost averaging is essential:
keeping away a fixed amount every month, and investing means expanding your entry point, such as buying a few tokens when the price is higher and more when the price is lower. This strategy helps avoid going all in at higher prices and trying to sell everything when the market crashes.
Do the opposite of what you hear on the news:
Did you hear that Bitcoin is dead? It’s Probably a Good Time to Shop. You’re watching a video on CNBC on How to Buy Ripple? The market is likely near the top, and now is a good time to sell or stay out.
Don’t buy because of an advertising campaign:
Is everyone talking about cryptocurrency or a new currency? The price is probably inflated, and it’s not a good time to buy the crypto. Better to wait until nobody talks about it and the market calms down.
Every new technology or innovation needs resources to become a real product and thus be widely accepted. People don’t work for free. The media hype surrounding the crypto bubble net is fine as it makes more people aware of the technology. This is important to facilitate mass adoption later.
In an ICO, the company raises the money it believes will be needed to reach the full roadmap. Sometimes this is more than 5 years in the future or longer. Existing projects are already fully paid for. There is no evil investor who takes over the financing and then destroys the project. This means that innovation can thrive without funding issues, and we think this is a great thing for the future of cryptocurrency projects.
How much does a bubble cost? The infrastructure now built is expected to serve future cryptocurrency projects. What kind of infrastructure does encryption need? Buying cryptocurrencies requires infrastructure. I may have to deposit money to Coin Base and transfer my Bitcoin to Binance to buy a popular coin. Coin base and Binance are a kind of infrastructure for the cryptocurrency world. Another example would be a developer platform like Ethereum. Decentralized applications based on this benefit from the infrastructure already established by Ethereum.
In the end, the cost of a bubble is multi-dimensional. It encompasses financial losses and market instability. It also has economic downfalls and psychological impacts. It dispenses the knowledge of the risks associated with speculative investment and the importance of careful financial practices.
Read More: https://bitcryptoforex.com/crypto-news/what-is-crypto-bubble-net/