Melt Up: Definition, How They Work, Examples

By Benjamin Locke – Updated Feb 19, 2025 at 2:04 PM

Key Points

Melt-ups lead to rapid market gains as investors rush to buy, fearing missing out.
Historical melt-ups include 1999's tech bubble and 2007's pre-crisis peak.
Investors should watch for signs of a melt-up, and plan exits to avoid potential crashes.

Sometimes, the market is driven more by investor sentiment than actual fundamentals, and a melt-up is this concept on hyperdrive. Although many will say that the primary driver of a melt-up is an excess of "fear of missing out" (FOMO), there are other drivers of a melt-up that are just as important. So, what causes a melt-up and how can you avoid getting caught up on the downside of one? Let's break it down below.

A stock chart hovering in the green, then plunging deep into the red, with percentages and stock quotes in the background. — Image source: Getty Images.

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How to navigate a melt-up

Stay disciplined and avoid emotional investing

One of the hallmarks of a melt-up is an uncontrolled investor frenzy, which can lead to serious pangs of FOMO, particularly when you see friends who got in early make a killing. While the temptation to chase high-flying stocks during a melt-up is strong, it's better to sit quietly and not do anything. Investors should stick to their long-term strategies and avoid making impulsive decisions based on hype.

Consider hedging strategies and speculative risks

During a melt-up, investors should explore hedging strategies to protect their portfolios from the almost certain downturn that will eventually manifest itself. One common approach is purchasing put options, which act as insurance against falling prices. Another strategy is reallocating some funds into defensive sectors like utilities, consumer staples, or bonds, which tend to be more stable during market volatility. These moves help cushion losses when markets inevitably cool down after a rapid surge.

At the same time, investors should exercise caution when making speculative investments. Melt-ups often lead to excessive risk-taking, with some traders chasing gains in overinflated assets. This risk-taking can be taken to another level for investors who use leverage. To avoid major losses, setting stop-loss orders and taking profits at key levels can help lock in gains. For example, during the crypto market boom of 2021, early Bitcoin (BTC -1.35%) investors who took profits near $60,000 avoided the massive downturn that followed in 2022 when Bitcoin collapsed to below $20,000.

The dot-com melt-up that eventually turned sour

One of the most famous melt-ups occurred in the late 1990s dot-com bubble, which is also one of the most studied melt-ups in history. Investors poured money into technology stocks, driving the Nasdaq Composite Index to an all-time high of 5,000 points in March 2000. Just a dot-com by the name of a company would drive sky-high valuations regardless of the company's underlying metrics.

Companies with no earnings or clear business models saw crazy valuations and money pouring in. FOMO drove investors to push stock prices far beyond their intrinsic value, creating an unsustainable market frenzy. When reality caught up, and the bubble burst, the Nasdaq lost almost 80% of its value over the next two years.

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