What Is An Economic 'Bubble' And How Can You Spot One?

An economic bubble is when asset prices rise rapidly and unsustainably. Speculation, not the asset's actual value, drives demand for these assets. When a bubble begins, investors are overconfident and pour money into one particular asset, causing the price to rise. This rapid growth leads people to believe that the price will keep climbing forever and that they will always be able to sell at a higher price. Eventually, A trigger event such as a disappointing earnings report spooks the market and everyone starts selling, causing prices to plummet dramatically. For example, in the 1990s, investors poured money into tech startups and companies as the internet took off without checking for their underlying value. After the bubble burst in 2000, the Nasdaq lost nearly 78% of its value, And investors lost trillions of dollars. The best way to spot a bubble is to look at an investment's true value and avoid getting swept up in the hype.