How a bubble is formed?

How a bubble is formed?

The term “bubble,” in a financial context, generally refers to a situation where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin. Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive sell-offs cause prices to decline, often quite dramatically. In most cases, in fact, a speculative bubble is followed by a spectacular crash in the securities in question.


Smart money and Investors

A displacement occurs when smart money and investors get enamored by a new paradigm, such as bitcoin at 3000 dollars


Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of investors and traders into the fold.


During this phase, caution is thrown to the wind, as asset prices skyrocket. Valuations reach extreme levels during this phase as new valuation measures and metrics are touted to justify the relentless rise, and the “greater fool” theory—the idea that no matter how prices go, there will always be a market of buyers willing to pay more—plays out everywhere. Media plays an important place here because they push to buy!


It only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot inflate again. There are a lot of profit taken area. In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. retail Investors and speculators, now want to liquidate at any price. As supply overwhelms demand, asset prices slide sharply. Media attention tend to increase this psychological biais


The story repeat again and again

Crypto example (POLKADOT)