Speculative bubble
What makes a price a bubble, and why is that judgment so hard to make while prices keep rising?
In plain words
A speculative bubble is a rise in price driven mainly by expectations that the price will keep going up, rather than by any change in what the asset produces or can be used for. The price drifts far above the level holders can justify with fundamentals, and stays there until buying pressure slows.
Why it matters
Risk taken near the top of a bubble carries two burdens at once: the price can fall a long way, and the usual reference points stop working. Valuation, past ranges and volume patterns all assume a price that someone can defend. When prices are set by belief in further buyers, those anchors give no support once belief shifts, and losses can be far larger and faster than the recent volatility suggested.
In a real week: ETH, week of 12 February 2024
In the week of 12 February 2024, ETH rose 14.92% to close at 2881.2, at its 52-week high, with its close in the upper third of the week range. Volume of 7.87 billion dollars ran 1.3 times its prior 12-week average, the weekly return sat in the 90th percentile of 313 weeks of history, and funding averaged 0.0106% per eight hours, meaning longs were paying. Each reading is consistent with demand outrunning supply; none of them establishes a bubble.
A common mistake
Treating a fast rise, a record high or euphoric sentiment as proof of a bubble. Such features describe a strong trend; the bubble label is usually settled only afterwards, once the price has turned.