As an investor, you know that the market bubble is very volatile. It can be bullish at first, and then suddenly turn bearish the next year or so. That is a normal reaction for an environment that is influenced by factors that are as unpredictable as the environment itself.
However, a rapidly changing environment could leave behind a swathe of “destruction,” so to speak. For the market, this swathe is made up of investors and entities that are meted with financial ruin as a result of the drastic downturn in the economy.
In the economic circles, this behavior is called the “bursting of the bubble.” Take care, because the market will always be heading towards that direction – the only question that remains to be answered is “When?”
What Causes a Market Bubble?
In the economy, a “bubble” is formed when financial growth is rapidly concentrated only on specific areas in the market. This means that investors are pouring money so fast into that market that it becomes overvalued and, at some point, will result to a downtrend when these same investors move their market into somewhere else.
Mini-bubbles can be observed, for instance, in the cryptocurrency sector, which can be thought as the most speculative of all markets. Whenever there is positive news for a certain company that issues cryptocurrency, prices are almost 100% certain to skyrocket in response.
This kind of demand, however, is artificial. The value of the coin is measured by speculative interest and not in the actual performance nor in the real movement of resources. Once speculators think that the coin is no longer viable or that they’ve earned enough from the uptrend, they’ll pull out and cause the price to rapidly drop.
What Are The Signs that a Bubble May Burst?
Education is always your best defense against the adverse effects of a market bubble burst. You should always know the signs of an impending bubble burst so that you can, at the very least, hedge yourself against the figurative explosion.
Here are two solid signs that a market is ready to pop, and bring down everyone with it:
- An extremely overvalued market
If the market you’re investing in, or even the individual issuer that you’ve bought stocks from, has a very high value, it would be best to look at several factors like the price-to-earnings ratio in order to determine if the item is overvalued and could be part of a market bubble. - The growth is caused by an artificial catalyst
The stock market itself is artificial, but when we talk “artificial,” it means that factors are manipulated in order to foster growth. In both the late 90s dot com bubble and the subprime mortgage crisis, very low interest rates fostered a number of real estate mortgages that eventually went unpaid and dragged the market down.
As an investor, it would be best that you keep your eye out always on the market. It only takes a few minutes to half an hour a day to brush on the current financial news. These few minutes might as well be your sturdiest shield against catastrophic financial losses.
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