E.G. the dot com bubble. The 2008 housing market bubble. And the recently talked about NFT bubble.
In: Economics
A bubble is when, basically, people start buying something solely because they believe someone else will buy it for more later on en masse without really having any reason for why it will be worth more.
This does, indeed, raise the price of the thing. I mean, lots of people are trying to buy it, so sellers raise prices in response. This attracts more buyers. The feedback loop continues and prices climb way out of proportion with any concept of the “fair value”* of the thing.
Eventually, people realize that, “hey, maybe paying $2000 for a thing that should really be worth $20 isn’t such a good call and I’m likely to lose a ton of money when the bubble bursts.” The pool of buyers dries up and, usually, everyone panics.
The people who bought hoping to sell later all try to sell at once before the price really crashes. This, obviously, crashes the price. The vast majority of people bought in well above fair value (which is likely where the price will settle in the long run) so most people lose a bunch of money trying to sell.
*Basically the price that reflects the actual value the thing creates for a buyer.
Latest Answers