A Bubble is a phenomenon in the field of investing that occurs when there is an artificial rush of investors, which provokes an increase in the value of assets to values ​​that do not correspond to their real value.

Digital coins, due to the commercial principles of value regulation, are an excellent opportunity to make money by buying and selling when the exchange rate changes. One of the phenomena that regularly occurs against the backdrop of the high volatility of cryptocurrency assets is a bubble. Its specificity lies in the fact that due to speculation and maintaining high demand, the value of a particular cryptocurrency is constantly growing as a result of the speculative actions of traders. The value of the digital coin rises while the bubble grows due to a surge in demand as long as investors are optimistic about the prospects for deposits. At the same time, information hype is created in the media space, which has nothing to do with the actual value of a particular digital asset. As soon as the advantage goes towards a rational estimate of value, the bubble bursts, and the price levels out to adequate values. Considering such factors, during the period of formation and expansion of a bubble, there is an opportunity to make a serious profit. Still, there is also the possibility of a final colossal drawdown for traders if all aspects are not taken into account and the wrong strategy for further trading is chosen.

Main stages of bubble growth

This phenomenon can occur in the cryptocurrency market and other areas where it gives traders and investors either a solid profit or an equally serious drawdown. Analysts have formulated several stages of the formation and development of a bubble until the moment it bursts:

• displacement - this stage starts when investors evaluate the asset as promising and attractive; due to word of mouth, demand begins to increase artificially;
• boom - characterized by a rapid rise in price, the effect of resistance is overcome by connecting an info phone and the enthusiasm of community members in anticipation of even greater profits;
• euphoria - at this stage, the peak value of the asset is observed; increased excitement does not allow investors to assess all risks sensibly;
• profit taking - here, a rational sense of caution already appears; investors are actively getting rid of the asset, receiving the expected profit;
• panic - due to a decrease in demand for a digital coin and an increase in supply, as investors seek to sell their assets as profitably as possible, their value drops sharply, usually lower than the limit value before the formation of the bubble.

Once the bubble finally bursts, an automatic market correction occurs, which provokes significant losses for those traders who invested at the peak price stage.

Ways to reduce the risk of financial drawdown from a bubble

To reduce potential losses, it is necessary to understand the mechanism of the bubble and sensibly evaluate all its stages. It is worth using aggressive strategies with greater caution, conducting analysis based on publicly available price movement charts, which allows you to determine the bubble's stage accurately. One effective way to preserve your capital is to liquidate assets at the peak price stage before the panic begins. Holding assets makes sense if future development prospects are assessed positively despite the temporary phenomenon of the bubble.