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.