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An economic cycle that has a rapid increase of market value, especially in assets which become overvalued.

The massive run up in prices is reserved by a quick decrease in value. This contraction is notable because of the speed and force with which it takes place.

In equities, bubbles can occur when stocks far exceed their "fundamental value". This can be defined as the present value of the stream of payments the shareholder expects to receive. This is a combination of the dividends expected to receive along with the anticipated sales price at some future date.

When markets are efficient, this value will equal the stock price. A bubble results when prices exceed this level, often by a large margin.

Any asset class that is freely traded and has speculation can move into a bubble. They also include credit, commodity and real estate.

Cryptocurrency, especially NFTs, also can become bubbles.

Stages:

• Displacement
• Boom
• Euphoria
• Profit Taking
• Panic

Probably the most famous could be Tulip Mania in the 1600s where people paid insane prices for tulips.

Since people are speculating on price appreciation, it is easy to see how people get FOMO, piling in. Greed ends up taking over with people believing the higher prices will continue.

Related:

• Tulip Mania

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