The Bubble Burst Era: A Wake-Up Call for Modern Investors

When investors talk about the “bursting bubble era,” the first thing that comes to mind is fear and uncertainty. Because this is the time when asset values soar to a peak and then suddenly collapse. During this bubble burst, many investors lose large amounts of money within just a few days. Bubble bursts are not new; they have happened repeatedly throughout history, each time claiming the same outcome, despite claims that “this time is different.”

What is a bubble burst, and how does it happen?

A bubble burst is an economic phenomenon where the price of an asset (stocks, real estate, currencies, or commodities) skyrockets beyond its intrinsic value. This surge is not driven by facts but by speculative expectations for quick returns, unrealistic market optimism, and the creation of positive feedback loops that attract more investors to pour money in as prices rise.

Simple principle: when prices detach from true value, they must eventually return. This correction happens quickly and brutally.

The causes of these bursts often stem from fundamental issues: investors realize that prices lack real economic backing, demand slows down, or events prompt people to sell off quickly. When a few sellers start, it can trigger a massive wave of panic selling that causes prices to plummet like a rock falling off a cliff in a matter of moments.

Lessons from history: asset bubbles in the past

The 1997 Asian Financial Crisis: When faith turned into disaster

In the 1990s, Thailand was a “small tiger” in the Asian economy, growing over 8% annually. Foreign investments flooded in like a fairy tale waterfall. The real estate market boomed. During that time, interest rates were unusually high, but borrowers confidently believed that “the interest rate spread will definitely pay off.” The real estate sector was unbalanced, with property prices soaring wildly, creating a massive real estate bubble.

Then, in January 1997, the baht was devalued by more than half. Suddenly, dollar-denominated debts doubled in value. Borrowers were caught off guard. The bubble burst, the real estate market collapsed, and expensive homes overnight became worthless.

The 2008 subprime mortgage crisis: When financial institutions became the bubble’s backbone

Moving to the US, the “world’s stock market” hotspot. From 2006 to 2008, mortgage loans approved for people with little or no ability to repay increased dramatically. Many financial institutions approved these loans regardless of verification because “these loans are quick and easy to generate.”

The problem was that these loans were bundled into complex financial instruments called MBS (Mortgage-Backed Securities), heavily invested in by major players. When borrowers started defaulting, the value of MBS plummeted. Global financial institutions faced massive losses, and a domino effect ensued, leading to a worldwide financial crisis.

Data shows: global financial institutions suffered $1.5 trillion in losses, millions of American households fell into foreclosure, and major banks collapsed.

Types of bubbles investors should watch out for

Bubbles come in various forms, depending on where they burst:

Stock bubbles

Form when stock prices rise without corresponding improvements in earnings. Classic example: the dot-com bubble (1995-2000). Internet companies with no revenue or profit IPO’d and soared.

Real estate bubbles

Housing prices escalate often due to excessive borrowing. Real estate is used for speculation (buying to flip, not for living).

Commodity bubbles

Gold, oil, or even rice prices surge due to speculation, lack of information, or incorrect demand forecasts.

Currency bubbles

Dollars, euros, Bitcoin, Litecoin—all can bubble when their value diverges from intrinsic worth.

Credit bubbles

When lending expands too rapidly. For example: 2020-2021, “easy money” policies led to billions in risky loans.

How bubbles burst: From speculation to panic

Bubbles don’t form overnight. They develop through five stages, each with warning signs:

Stage 1 – New innovation: Technology, low interest rates, or new industries that “will change the world” attract investor interest.

Stage 2 – Initial buying wave: Money flows in due to FOMO (Fear of Missing Out). Prices start rising genuinely.

Stage 3 – Peak excitement: Media hype, news, and widespread talk. Everyone invests, and prices hit historic highs.

Stage 4 – Early signs: Smart investors start selling to lock in gains. Doubts emerge. Signs of volatility appear.

Stage 5 – Panic: Suddenly, everyone realizes “prices are not justified.” Massive sell-offs occur, prices plummet, and the bubble bursts.

Factors driving bubbles: Both sides of the coin

It’s not always clear-cut. Many factors contribute to bubble formation:

External factors:

• Low interest rates = cheap borrowing
• Booming economy = confidence persists
• Technological advances = belief “this time is different”
• Foreign capital inflows = increased liquidity, rising prices

Psychological factors:

• Speculation: “Quick money”
• Herd behavior: “Everyone’s investing, so I should too”
• Irrational exuberance: “This time is truly different”
• Faith in one’s knowledge: “I know it won’t crash”
• Expectation of rapid gains: “If others can do it, I can too”

All these factors cause prices to detach from true value. When economic data or events trigger awareness, the bubble can burst.

Strategies to protect and cope with bubbles

The most important thing is: Be prepared until the right time. You can’t avoid bubbles entirely, but you can minimize losses:

1. Reassess your objectives Before investing, ask: “Why am I investing?” If the answer is “because others are doing it” or “to make quick money,” consider skipping. That’s a clear bubble signal.

2. Diversify your portfolio Don’t put all your eggs in one basket. If a bubble in credit bursts, your stocks or other assets may still be safe.

3. Keep cash reserves When a bubble bursts, it’s a good time to buy. Having cash on hand makes you a buyer, not a seller.

4. Use dollar-cost averaging Instead of investing a large sum at once, invest small amounts over time. This reduces risk of buying at the peak.

5. Study fundamentals Stay informed about the business, industry, and economic factors. Understand “why prices should rise,” not just “because they are rising.”

6. Set clear profit and loss targets Decide: “I will sell at X% profit” and “I will cut losses at Y%.” Stick to your plan, even if emotions tempt you otherwise.

7. Be cautious of continuous good news When constant positive news emerges, it may signal the bubble’s peak. Often, the end comes when optimism is at its highest.

Conclusion: Bubbles are cyclical, not exceptional

Bubble bursts are not anomalies or relics of the past. They are part of the economic cycle—markets rise, excite the world, then fall, disappoint, and start anew.

History has taught us:

• 1929: Stock market crash
• 1997: Asian Financial Crisis
• 2000: Dot-com bubble
• 2008: Subprime mortgage crisis
• 2018: Crypto crash

And new bubbles keep forming.

What you can do is prepare, not avoid. Diversify, build reserves, understand your investments, and keep emotions in check.

Knowing about bubble bursts allows you to invest more wisely and safely. Bubbles are part of the game—those who are better prepared are the winners.