Price bubbles can form in any market where supply and demand dynamics exist. Prominent examples range from the Beanie Babies craze of the 1990s, to the infamous Tulip Bubble centuries ago, and to more recent and grave examples such as the 2008 Housing Crisis.
Price bubbles transpire when demand outstrips supply. The more rapid the increase in demand coupled with a more constrained supply, the larger the price bubble inflates.
Cryptocurrencies have faced multiple price bubbles. Except for stablecoins, every cryptocurrency has gone through this phase, which typically coincides with a surge in media attention. News of a breakthrough in a specific technology field by a certain coin may spread, leading to a global buying frenzy.
Cryptocurrencies are particularly susceptible to price bubbles compared to other assets, primarily due to their global reach. For instance, a housing bubble is confined to the specific country or region where it originates, and stock availability can also be regional – take U.S.-listed Apple as an example.
In contrast, Bitcoin and other cryptocurrencies have a global marketplace. From the UK to Zimbabwe, anyone can purchase these digital currencies. When news spreads, it results in a surge of demand against a fixed supply, culminating in price bubbles.
Price bubbles burst when demand ceases to grow. At that point, those who anticipated the price to perpetually increase begin to fear a crash and start selling. This initiates a reverse trend where more people succumb to panic selling, increasing the supply in the market. The price continues to plummet until the market clears of panic sellers offloading their coins.