Bubble Burst: Why the Market is Slumping and How to Protect Your Money

Whenever investors talk about bursting bubbles, it’s like a chilling warning that makes the hairs stand up and the guns ready because this term is mostly associated with financial crises, economic downturns, and large-scale losses. This phenomenon is part of the economic cycle characterized by asset prices soaring faster than they should, followed by sharp and rapid contractions.

What is a bubble: The cold truth of the market

A bubble occurs in a relatively simple way: when the price of any (asset class such as real estate, stocks, crypto, etc.) skyrockets far beyond its intrinsic value. This is driven by speculation, persistent investor belief that prices will never stop rising, and a collective confidence that they are about to become millionaires.

When discussing this process, it’s clear that it doesn’t stem from a single cause but from a combination of human irrational behaviors—from fear of missing out to the desire to build wealth quickly. In this scenario, prices become artificially inflated while reality remains outside the field of play.

Lessons from history: How damaging are bubbles when they burst

The history of financial markets is full of examples of severe bubble crashes. Let’s see what real situations tell us.

2008 Subprime Crisis: When real estate became a weapon for speculation

Before the crash, the US experienced a housing frenzy. Banks began issuing loans to unlikely borrowers—those without stable income or good credit histories. But as “discounts” appeared, house prices soared, and investors saw real estate not as homes but as assets that could generate profits if their values increased.

Banks also created complex financial instruments from these loans, making it easier for many to invest in real estate. The market boomed without real benefit, but when borrowers started defaulting, the entire system collapsed. Expected global bad debts reached $15 billion.

The 1997 Asian Financial Crisis: A lesson from Thailand not to forget

In Thailand, at the same time, property prices surged like a hot pot. High interest rates and an overheated real estate market drew investors seeking quick profits, and foreign capital flowed in.

On July 2, 1997, the unthinkable happened—the Thai baht was devalued, foreign currency debts exploded, and when many tried to sell their properties simultaneously, prices plummeted. Investors who borrowed heavily to invest faced disaster.

The clear lesson: borrowing to invest in long-term assets with short-term loans is playing with fire.

Which markets are at risk of a bubble burst

These bubbles are not limited to housing alone.

Stock Market: Some stock prices soar beyond the company’s true value, measured by earnings, assets, and performance. Bubbles can burst in individual stocks or entire sectors.

Real Estate: The classic bubble—housing prices rise so high that ordinary people need years of savings but still cannot afford to buy.

Currencies: Both traditional currencies like the dollar and digital currencies like Bitcoin can form bubbles.

Commodities: Gold, oil, industrial metals—when trading is highly profitable, prices can spike unrealistically.

Credit: When credit expands too rapidly, the entire system becomes fragile.

Why do bubbles burst: Factors and psychology

It’s not just one factor that causes a bubble to burst but a combination of many.

Economic factors: Low interest rates encourage borrowing; a healthy economy attracts investments; new technologies stimulate demand; asset shortages push prices higher.

Investor behavior: When prices rise, everyone rushes in out of fear of missing out. Herd behavior causes people to follow peers, and short-term profit hopes blind them to dangers.

Psychological biases: People ignore warning signs and only trust information that supports their beliefs. Short-term thinking makes them believe they can exit the market just before the crash.

These factors intertwine, creating an unsustainable cycle that eventually reaches its end.

The 5 stages of a bubble: From inception to burst

Stage 1 - Exciting new thing: Something new emerges—technology, low interest rates, or a new industry that makes people believe the world will change, like the dot-com bubble.

Stage 2 - Crowd influx: When opportunities look good, everyone rushes in for fear of missing out. Money flows in, prices rise, creating a positive feedback loop.

Stage 3 - Overconfidence: During this phase, investors believe prices will keep rising indefinitely. No obstacle can stop them. Investment and speculation soar, and prices reach unrealistic levels.

Stage 4 - The realization: People start to realize prices are too high. They sell assets to lock in profits, leading to volatility.

Stage 5 - Panic: Selling accelerates as others panic and sell too. The rush to exit causes prices to fall rapidly and sharply—official bubble burst.

Protecting yourself from a bubble burst

Although avoiding a bubble burst entirely is difficult, investors can do certain things to reduce risk.

Question your motivations: Are you investing based on careful analysis, or just because you’re afraid of missing out as others profit? If it’s the latter, you’re part of the problem.

Diversify: Don’t concentrate your portfolio in a single “hot” asset. Spread across different asset classes and regions so that if a bubble bursts, you won’t panic as much.

Limit speculation: If you suspect a bubble is inflating, reduce exposure to speculative assets. These tend to be the first to collapse when the bubble bursts.

Invest gradually: Instead of putting all your money into the market at once, use “Dollar Cost Averaging”—invest small amounts over time. This helps avoid buying at the peak and reduces volatility impact.

Hold cash reserves: Having cash on hand allows you to capitalize on opportunities after a bubble bursts and provides a safety net if you need to sell positions.

Keep learning: Knowledge is the best defense. Stay informed about market news, understand the assets you invest in, and research wisely before parting with your money.

Summary: Understanding bubbles to avoid collapse

Bubbles occur when asset prices soar beyond their true value, driven by speculation and collective belief that prices will never stop rising. Initially, demand increases while supply is limited, pushing prices higher. But this exuberance cannot last forever. Overconfidence and excess supply lead to declining demand, and when selling begins, prices fall rapidly—bursting the bubble.

This phenomenon is not new in history; investments in commodities, real estate, stocks, and even digital currencies have all experienced bubble bursts.

The key is understanding where the hype comes from, watching for warning signs, and preparing for opportunities. By diversifying, investing cautiously, and continuing to learn, you can navigate through the storm of a potential bubble burst more safely.