Financial bubble, what is it and what assets are related to financial bubbles
You probably often heard a warning that a financial bubble has formed on the market, while many have a question - what kind of phenomenon this is and how is it dangerous?
The financial bubble is a market situation, when the price of an asset is unreasonably growing and significantly exceeds its real value.
Typically, the reason for this is mass excitement among investors who begin to actively buy assets, believing in endless prices, and make a purchase at a very high price.
The main signs of the financial bubble can be called: sharp and inexplicable price increase, universal optimism of investors without serious reasons and ignoring obvious risks.
Among the signals that the financial bubble is about to burst-sharp fluctuations in prices, the appearance of negative news or a sharp drop in transactions.
History knows many examples of financial bubbles. The most famous of them are “tulipanomania” in Holland of the 17th century, when the prices for tulips bulbs reached incredible heights and then fell sharply, and the “bubble of bubbles” in the USA early 2000s, when the shares of Internet companies grew rapidly without any economic basis, and then collapsed, leaving many investors with nothing.
Assets that most often become financial bubbles
There is a certain category of assets with an increased risk of a sharp drop in price; when buying them, you should be extremely careful.
Cryptocurrencies are the most striking example of recent years - cryptocurrencies, such as Bitcoin, Ethereum, especially different meme tokens. Their prices are often rising due to enthusiasm and faith in technological innovation. But when investors begin to understand that the real utility of the coin is below expectations, a sharp drop in value occurs.
Promotions of technological companies - especially the shares of fast -growing technological companies and startups are turned into a bubble. Investors are invested in these shares in the hope of a huge future profit, but many companies cannot withstand competition or do not live up to profit expectations, which leads to the collapse of their shares.
Real estate - the real estate market periodically experiences financial bubbles. Prices begin to grow rapidly, because people are sure that housing is a reliable investment. But if prices are very torn from the real cost of housing and the level of income of the population, then sooner or later the correction and fall of the market is inevitable.
Precious metals are surprisingly, even such assets as gold and silver, also sometimes become financial bubbles. People begin to massively buy precious metals in crisis times at high prices, believing in their safety. However, when the panic passes, prices are returning to a more realistic level.
How to protect yourself from the consequences of a financial bubble?
In order to avoid serious losses associated with the bursting financial bubble, you can use simple and affordable methods such as stop losses and hedging.
- Stop loss is a simple installation on a trading platform that will automatically close your position when reaching a given level of loss. The deferred order to close the transaction after the price fall will avoid large losses.
- Headfront is a method of protection in investments in which you invest in assets with reverse correlation, that is, if the value of one asset falls, then another, with a high probability, will be price. For example, by buying bitcoin you can simultaneously open a deal on the American dollar index, since these two assets have a pronounced negative correlation. Download a book about hedging investments .