Cryptocurrencies have thrown the financial world upside down with the promise of quick riches, decentralized finance and a new way to send money outside of traditional channels.
But the promise of all that opportunity also carries substantial risk — particularly in the shape of crypto bubbles. Such bubbles can inflate and deflate with remarkable speed, leaving billions of dollars of market value destroyed in a matter of days.
Whether you’re already dipping your toes in or plan to invest in crypto, learn what causes a crypto bubble to form, how to spot one and, most importantly, how to protect your hard-earned money.
What Is Crypto Bubbles?
When the price of a crypto gets bid way past its intrinsic value, often due to speculation, hype, and emotional investing, it’s what I call a crypto bubble. Ultimately, when the euphoria fizzles, or the market wakes up to the fact that the price was never warranted, the bubble bursts — and prices plummet.
Cryptocurrencies are new and not fully understood, unlike traditional financial assets. That makes them particularly easy prey for hype-driven spikes, which in turn makes bubbles both more frequent and more extreme.
How to Know if You Are in a Crypto Bubble
If you want to avoid getting caught up in the crash, you have to be able to spot the warning signs early. Here is a look at some common signs of an inflating crypto bubble:
Pyramids in Prices Without Any Basis
When the price of a coin doubles or triples in a short period — and there is no significant update, product launch or partnership announcement — this could be a bad sign. Prices need to reflect worth, not just buzz.
The Over-media and Over-industry-hype
But when the mainstream news and influencers are splashing your feed with hype about a coin, it tends to generate FOMO (fear of missing out). And, while that might sound like a good thing, it typically means the market is overheating.
Celebrity Endorsements
Celebrity endorsements can generate short-term price spikes. But these are often about influence, not facts or technology — and can result in unsustainable price bubbles.
Newbie Trading With Emotions
Lots of people who enter the market for the first time get in on hype, chasing easy money. It wouldn’t be a bubble unless who those buyers are don’t even understand what it is they are buying.
Protect Your Crypto Investments
As an investor, minimizing risk isn’t about avoiding it entirely — it’s about managing it with intelligent, informed strategies. Here are the best ways to avoid getting burned during a crypto bubble:
Diversify Your Portfolio
The best way to minimize risk is by diversification. Instead of betting almost entirely on or against one cryptocurrency, diversify your holdings over different coins or even asset classes (such as stocks or gold). That way, if one investment crashes, the others may retain some value.
Use Stop-Loss Orders
Such orders are called stop-loss orders, or automated instructions that your crypto should be sold on the way down to a certain rate. This reduces your losses in case of sudden crashes as well as taking the emotional element out of the decision-making process.
If you buy a coin at $100 and set a stop-loss at $90, for example, the system will automatically dump the coin if the price drops — saving you from continued losses.
Take Profits in Stages
Instead of attempting to sell everything at the top — an almost impossible feat to forecast — try selling your holdings in chunks as the price ticks higher. With this approach, you can lock in gains over time, but continue to benefit if prices keep rising.
Avoid Emotional Trading
The crypto market is fast moving, and if you act based purely on greed or fear, you can easily make poor decisions. Stick to a sound investment plan. Don’t buy into the hype or panic sell.
Learn From History
Previous bubbles, such as Bitcoin’s meteoric climb in 2017 and the subsequent crash in 2018 of initial coin offerings, demonstrate how quickly prices can plummet once a bubble pops. These are all reasons why one should have left earlier and not held overpriced assets in the hope that a final rally would ensue.
Spotting the Peak Before It Pops
There is no knowing when the top will come of a crypto bubble, but there are some echos of that.
• An abrupt change in the mood (from euphoria to fear)
• An increase of big sell orders and a decrease of buy pressure
• A slippage in new users or investor enthusiasm
When those signals do exist, it is frequently better to move early rather than wait too long and end up with steep losses.
Bottom Line
Crypto bubbles are a feature of the game — and they’re dangerous if you’re not ready. But there are ways to protect your portfolio — and even profit from these jumpy markets. Stay informed, stay diverse, set a stop-loss order, and dollar cost average your profits. Above all, don’t let emotions dictate what you’re going to do.
Keep in mind that “picking the top,” is almost impossible. As Chase the Perfect puts it, focus on reducing risks and taking smart moves, rather than chasing perfect gains. The point isn’t to make money while the bulls are running, but to keep it after the bubble bursts. Stay smart. Stay cautious. And never invest without a strategy.