Financial Bubble: Do You Know the Signs and Strategies to Protect Yourself

When Thai and global investors talk about “bursting bubbles,” they often think of severe financial crises, crippled economies, and significant losses. In fact, a bubble burst is a market cycle where the fundamental issue is that the prices of various assets rise far beyond their intrinsic value. When awareness occurs, prices plummet sharply.

What does a bubble burst mean?

A bubble occurs when the market value of any asset — whether real estate, stocks, cryptocurrencies, or even commodities — is sustained at a level much higher than its true worth. This phenomenon often begins with the psychological biases of speculators, excessive confidence, and the belief that prices will keep rising.

Before the bubble bursts, prices soar due to increased demand and the belief in perpetual growth. However, once the market reaches saturation and investors realize the reality, prices tend to fall rapidly as a herd mentality triggers mass selling. The result is a sudden collapse, causing millions of investors to lose money in a matter of weeks.

Lessons from past crises

The 1997 Asian Financial Crisis in Thailand

In 1997, Thailand faced a severe crisis. Domestic interest rates soared, and the real estate market was booming. Investors saw an opportunity for extraordinary profits, leading to a flood of foreign capital.

However, on July 2, 1997, the government decided to float the Thai baht, resulting in a sharp increase in external debt. Simultaneously, the real estate bubble burst, with property values plummeting. Borrowers unable to repay their loans caused the Thai economy to falter, prompting the country to seek a bailout from the International Monetary Fund.

The 2008 Subprime Mortgage Crisis in the US

Looking back at the United States before 2008, financial institutions began issuing mortgage loans to subprime borrowers or those with little to no ability to repay. This strategy aimed to familiarize people with homeownership. Many borrowers bought not for residence but for speculation.

Banks repackaged these loans into securities (MBS), rated highly by credit agencies, attracting global investors. The housing market inflated. When borrowers started defaulting, and the false data was exposed, the market collapsed. The resulting bad debts, totaling $1.5 trillion, led to the collapse of major financial institutions worldwide.

Types of bubbles

Stock Market Bubble

Stock markets can form bubbles when stock prices rise beyond actual earnings, assets, and operational performance of companies. Exchange-Traded Funds (ETF) and various sectors can also be affected.

Widespread Asset Bubbles

Real estate is a primary field for bubbles. Currencies, whether fiat, dollar, euro, or digital assets like Bitcoin and Litecoin, have all experienced bubble formations.

Credit Bubble

When consumer and business loans remain excessively high, and credit expands rapidly, it can create a fragile situation.

Commodity Bubble

Gold, oil, metals, and agricultural products can sometimes spike uncontrollably when demand forecasts are overly optimistic.

Why do bubbles occur?

Bubbles often start from genuine positive factors — low interest rates, a healthy economy, or new technologies creating hope. Investors see opportunities and rush in. Prices begin to climb, and people believe they will continue to do so.

Psychological biases play a significant role:

• Fear of missing out (FOMO) causes investors to overlook underlying issues.
• Herd mentality deepens market turmoil.
• Short-term decision-making prevents investors from recognizing warning signs.

As a result, asset prices diverge from their intrinsic value until reality forces a correction.

5 phases of expansion and bursting of a bubble

Phase 1: Change — New innovations or industries emerge, attracting investor hope.

Phase 2: Adjustment — Capital flows in, prices soar, and markets heat up.

Phase 3: Peak Excitement — Prices reach irrational levels, but investors remain confident.

Phase 4: Harvesting — Early investors sell to lock in profits, signaling the beginning of collapse.

Phase 5: Panic — When everyone realizes the bubble has burst, they rush to sell, causing prices to fall dangerously.

How to protect yourself from bubble risks

Check your motivations — Are you investing out of fear of missing out or based on thorough analysis? Find the answer before deciding.

Diversify wisely — Avoid putting all your funds into a single asset class.

Avoid speculative bubbles — When warning signs appear, reduce risk rather than increase it.

Invest gradually — Use “Dollar-cost averaging” to mitigate volatility.

Keep cash reserves — Cash provides flexibility and acts as a safety net during crises.

Study the market before investing — Knowledge and analysis are the best defenses.

Summary

A bubble burst is part of a recurring market cycle where prices rise beyond their true value and then fall sharply. History shows that greed driven by FOMO (Fear of missing out) is a common pattern.

The most effective approach is to understand the market, diversify risk, follow a plan, and avoid impulsive decisions. Investors who have experienced bubble bursts will tell you — self-preservation is always better than losing money.