Bubble Burst Era: When Investment Dreams Turn into Nightmares

When it comes to the bursting bubble era, most investors tend to feel quite anxious because, in financial history, this event has caused tremendous impacts on the global economy multiple times. It is a natural cycle that occurs when asset prices expand rapidly and then suddenly collapse.

Why Do Prices Overheat?

In the early stages of a bubble burst, the market is often filled with new and exciting things, whether it’s cutting-edge technology, record-low interest rates, or industries promising life-changing opportunities. Investors rush in, fearing they might miss out.

Soon, prices keep rising. The more people see prices go up, the more they rush in to speculate. This positive feedback loop causes prices to diverge further from the true value of assets. People buy not because the assets are good, but because they believe others will pay higher prices in the future.

This behavior is driven by psychological biases, such as herd mentality, which makes people follow the crowd, and short-term thinking, believing “I’ll get in now and get out before it crashes.” As long as prices keep rising, these beliefs are held with utmost confidence.

Real Historical Examples

The 2008 Subprime Crisis and the US Real Estate Bubble

In early 2007, one of the causes in the US was lax mortgage lending. Banks issued loans to people who couldn’t afford to repay. You could borrow money to buy a house from the very first day you opened an account.

These massive borrowers weren’t buying homes to live in; they were investing for profit. Financial institutions created complex derivatives linked to these loans, fueling the market further.

Housing prices kept rising, and the value of these securities increased accordingly. Everything seemed to be going well until borrowers started defaulting.

The entire system collapsed. The bubble burst, home prices plummeted, and bad debts from financial institutions worldwide reached $15 billion. This crisis wasn’t limited to America but affected the entire global financial system.

The Asian Financial Crisis and the Thai Real Estate Bubble in 1997

During the Asian financial crisis, Thailand’s economy was booming. Interest rates were high, but the real estate market was thriving. Investors saw opportunities, and foreign capital flowed in heavily.

Loans expanded rapidly, and property prices soared without reason. Then, on July 2, 1997, the Thai baht was devalued.

Suddenly, foreign debt borrowers faced enormous liabilities. The bubble burst, property prices fell sharply. Major and minor investors were left with unsellable assets. Thailand’s economy plunged into a severe downturn.

A clear lesson: borrowing to invest in long-term assets using short-term loans is a recipe for disaster.

How Many Types of Bubbles Are There?

Stock Market Bubble

Occurs when stock prices rise above the intrinsic value of companies, based on fundamentals such as earnings, assets, and performance. This bubble doesn’t just affect individual stocks but can lead to the collapse of the entire stock market or ETFs and specific sectors.

( General Asset Market Bubble

Extends beyond stocks, impacting broader economies. Real estate is a common target; housing prices exceed sustainable levels. Currencies can also form bubbles—whether dollars, euros, or even cryptocurrencies like Bitcoin and Litecoin. When prices surge beyond what the market can sustain, they may crash suddenly.

) Credit Bubble

Happens when consumer and business credit expand rapidly, with soaring debt instruments and lending. In these bubbles, excessive borrowing makes the system fragile. Minor economic problems can trigger massive defaults.

Commodity Bubble

Occurs when prices of resources like gold, oil, industrial metals, or agricultural products spike uncontrollably. Speculative demand drives prices beyond sustainable levels. When demand drops or supply increases, prices collapse.

5 Stages from Formation to Burst

1. Emerging Event: You feel excited about a new possibility—be it technology, low interest rates, or a new industry.

2. Uptrend Phase: Investors rush in, everyone fears missing out, capital flows in, and prices rise.

3. Peak Excitement: Optimism peaks; everyone believes prices will keep rising. Speculative investments become common.

4. Profit-Taking: Some realize prices are too high and start selling. Early signs of volatility appear.

5. Panic: Everyone realizes the market is turning. Panic selling ensues, and the bubble officially bursts, causing prices to fall.

Psychological Drivers of Bubbles

Bubbles aren’t caused by market “madness.” They result from the psychological decisions of individuals.

The truth is, most investors follow the herd without deep analysis. They only see data confirming their beliefs, ignoring warning signs, which makes the bubble grow larger.

Herd mentality causes our brains to shut down logical reasoning. Seeing others profit, the fear of missing out drives decisions rather than rational analysis.

How to Protect Yourself from a Bubble Burst

Clarify Your Investment Objectives

Ask yourself: Are you investing because you truly understand the asset, or are you chasing profits out of panic? If it’s the latter, you might be part of the problem.

Diversify Risks

Don’t put all your eggs in one basket. Diversify your portfolio wisely to reduce losses when a bubble in one asset class bursts.

Limit Speculative Exposure

If you suspect a bubble, reduce exposure to overly speculative assets. These are often the first to crash during a downturn.

Invest Gradually ###Dollar Cost Averaging###

Instead of investing all at once, invest small amounts over time. This helps avoid buying at the peak and reduces volatility impact.

( Keep Cash Reserves

Having cash on hand is crucial. It allows you to take advantage of buying opportunities after a bubble bursts or serve as a safety net if you need to sell during a crisis.

) Continuously Study and Monitor Data

The best defense is knowledge. Keep track of market reports, analyze data, and make informed investment decisions.

Summary: Understanding the Bubble Burst Cycle

The bubble burst is a natural market cycle that may be unavoidable, but you can prepare for it. Learning from history helps you recognize when a bubble might burst—like having a radar in your mind.

Many investor behaviors and psychological factors contribute to bubbles forming. You must avoid being trapped, invest wisely, diversify, keep cash, and stay informed.

This approach will not only help you survive the bubble burst but also enable you to capitalize on many opportunities that arise after the bubble collapses.