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What is a market bubble?

Definition: A market bubble is a term for a rapid, unjustified increase of the price of assets (mostly commodities, stocks, and estate), followed by a rapid price decline.

During the first 2 stages of the market bubble, investors rapidly raise the price of an asset because they are optimistic about its future value. 

During the following stages, the asset’s price becomes so high that it doesn’t correlate to the fundamentals, such as cash flow, demand, etc., leading to a price decline.

Example of a market bubble

An example of a stock market bubble was the cryptocurrency bubble in 2017 when the value of Bitcoin skyrocketed from $1000 to $20,000 in a few months. 

Within a year, the bubble burst, and the price of Bitcoin decreased by 80%, negatively affecting most investors.

The rapid increase in the price of Bitcoin occurred due to social media hype over innovative technology, and the bubble burst was caused mainly by market manipulation.

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Article FAQs

What is a stock market bubble?
A stock market bubble refers to the rise in prices of stocks to a price level way over their actual worth. The “Chinese Stock market bubble” took place in 2015, when stock prices peaked, but after the government's interference, the bubble abruptly burst.
How long do market bubbles last?
Market bubbles can last months or years. It is very hard to predict when a bubble will form and burst. Some famous market bubbles ( housing bubble in the USA) lasted for years before they burst.
Is inflation a bubble?
No, inflation isn’t a bubble because bubbles refer to specific assets whose value doesn’t support the sudden rise of their prices. Inflation refers to the subtle rise of prices of all goods over time.

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