An investment bubble is a situation in which the price of certain assets significantly exceeds its actual value. This situation is usually caused by market speculation and excessive optimism. In this case, asset prices will rise rapidly, attracting more investors to join in, forming a speculative boom, which will eventually lead to the collapse of asset prices and market collapse.

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What are the characteristics of foam?

• rapid price rise

A bubble is characterized by a very large increase in asset prices in a relatively short period of time. The increase in asset prices does not conform to the economic laws of fundamentals. This increase in prices is usually driven by people's speculative purchases. More and more people will have a strong impulse to buy, and eventually the asset price is much higher than its actual value.

• general optimism and fanaticism

During a bubble, market participants generally believe that the upward trend in prices will continue. Investors showed excessive optimism and selectively ignored the risks associated with investment. A large number of investors poured into the market, which exacerbated the rise of asset prices.

LUNA is one of the most representative cases. It was considered to have a "perfect" working mechanism when it was launched. At the same time, its Founder: Do Kwon has a huge influence, and investment in Luna products also has a fixed annualized rate of 12%. Yield, related tokens will also bring other 'certainty' benefits.

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How to identify investment bubbles?

• Bursting volume and liquidity

Bubbles are also accompanied by increased trading volume and higher liquidity, as investors scramble to buy assets, hoping to profit from further price increases.

This surge in trading activity is often accompanied by a decline in market depth. When the trading volume surges in a short period of time, we have to consider the risk of financial bubbles.

• excessive leverage and debt

Bubbles are usually fueled by ever-increasing lending and ever-higher leverage.

When prices have been rising, a large number of investors may use loans, take on large amounts of debt to invest, in order to increase returns, but also increase the risk of large losses when the bubble bursts.

When a bubble bursts, investors can face huge losses because they used too much borrowing or took on too much debt to invest, which made their losses even worse. Therefore, excessive leverage and debt are an important factor in the formation of bubbles.

During the Bitcoin bubble of 2017, there was a huge increase in the number of people using leverage and taking on debt.

Many investors use stock loans, credit cards, traditional loans, etc. to expand their investments.

These phenomena indicate that there is a bubble in the market and it may be about to burst, which is often a clear sign to identify a bubble that is about to burst.

• media coverage

Financial bubbles attract a lot of media coverage, further driving public attention and participation in the market.

This phenomenon contributes to the formation of bubbles by creating a positive feedback loop of hype and speculation.

Media attention and public participation is an important factor in the formation of bubbles.

During the 2017 bull run, John McAfee made two statements:

• "Bitcoin will reach $500,000 in 2020";

• "Under the new technology of blockchain, data analysis shows that there is currently no bubble".

These remarks attracted a lot of people at the time, but in the end it turned out to be an investment bubble trap.

• warning sign

Among market participants and analysts, there may be a minority who raise concerns or doubts about the sustainability of price increases and fundamentals.

At the height of a bubble, these warning signs are usually ignored and dismissed by most.

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The Three Stages of Financial Bubbles

Foam formation is generally divided into five stages:

1. trigger period

2. Boom period

3. Expansion period

4. profit period

5. panic period

These phases match the characteristics of bubbles, further helping us to detect potential bubbles.

• trigger period

Investors develop a love for a new technology or narrative, especially if current market sentiment is favorable.

In the cryptocurrency market in the past, technologies such as artificial intelligence and the metaverse have sparked this boom, and these technologies have provided people with "reasons" to invest, thereby driving the market to flourish.

• Boom period

In the first phase, the price rises slowly, and then reaches a point where it starts to accelerate.

This accelerated upward trend has attracted more and more new buyers and retail investors to enter the market, and the boom period is a key period for attracting new buyers and retail investors.

• Expansion period

The number of people sucked into rising assets has grown at an unimaginable rate.

This caused prices to expand to extremely high levels, while media coverage created new analyzes and assessments to "justify" the surge, adding to the exuberance of the market.

• profit period

This is the stage where the smart money sells their positions and begins to look out for "bubble burst signals".

• panic period

Panic is of course the final stage in anticipation of the market "reloading" and then bursting out again, where investors see the market falling in price and are not sure when it will bounce back, get panicked and nervous, and start Entering a death spiral, when confidence weakens, the bubble bursts and asset prices drop rapidly and dramatically, often referred to as a "market correction." Market adjustment is usually a self-correcting mechanism after a bubble bursts, which can clear up overvaluation and unreasonable prices in the market and restore the normal operation of the market. Therefore, bubble bursting and market adjustment are inevitable processes in a market economy.

Before deciding to invest, we need to ask ourselves a few questions?

• Is this asset really worth the investment?

• Does it have an actual product?

• What stage of development is it in? (final product or test product)

• How good or bad is the market sentiment related to the asset, i.e. what the market thinks and expects of the asset?

Remember that bubbles last longer than often expected and timing is often very difficult. As an investor, you need to be able to identify potential risks and opportunities, such as market hype, asset intrinsic value and price action phases. These factors may materially affect the performance of an asset. Finally, investors should remain calm and not be swayed by market sentiment, so as to avoid losses when the market bubble bursts.