Bubble Burst - From Theory to Prevention: How to Respond Amid Risks

When it comes to bubbles bursting, many people immediately feel anxious because this is the moment when investors’ wealth can disappear in the blink of an eye. A bubble bursts when asset prices rise above their fundamentals to the point they cannot be sustained. The most frightening thing is not a single crisis, but the repeated pattern throughout financial history.

What is a bubble burst: The hidden mechanism of the market

A bubble burst doesn’t happen by chance. It results from a cycle that mathematics cannot predict. In reality, bubbles are part of an economic cycle characterized by: rapid price increases, rising confidence, and a loss of connection to reality.

When asset prices (whether real estate, stocks, or digital currencies) exceed their true value, it signals the start of a bubble burst. This process begins with small hopes but develops into repeated speculative trading, where people buy assets not for their actual worth but because they believe prices will keep rising.

Like a balloon that inflates each time, it eventually pops when the first signs of reality appear. When thousands of people are forced to sell, prices plummet.

History repeats: Lessons from past bubble collapses

Thailand learned this lesson in 1997 when interest rates soared to abnormal levels. The real estate market seemed unstoppable. Foreign investors flooded in, all believing this golden opportunity wouldn’t come again. On July 2, 1997, the Thai baht was devalued, and suddenly, the bubble burst violently.

The devaluation caused foreign debt to skyrocket. Many investors were forced out or suffered losses, losing everything. Assets that once seemed valuable plummeted in worth. The Thai economy contracted sharply.

Look at a bigger event: the 2008 subprime mortgage crisis in the US. Banks started issuing home loans to people who shouldn’t have qualified. They knew what was happening but packaged these loans into complex derivatives and sold them worldwide. Housing prices soared, and everyone thought they would keep rising forever.

When borrowers began defaulting, everything collapsed. Global financial institutions faced $15 trillion in bad debt. The world nearly sank because of this event.

Main types of bubbles: The investor’s detection net

Not all high-priced assets turn into bubbles, but bubbles have many faces:

Stock bubbles: Stock prices soar beyond the company’s actual earnings. A classic example is the dot-com bubble, where startups with no profits were valued like Apple.

Real estate bubbles: Houses are expensive but of poor quality. When interest rates rise or demand drops, prices fall even though you still owe the same.

Commodity bubbles: Gold, oil, industrial metals—all depend on global demand. When demand drops, prices fall sharply.

Cryptocurrency bubbles: Bitcoin and other digital coins lack real backing. Sometimes, they turn into old gambling games in new forms.

Warning signs: 5 steps to a bubble burst

Knowing how bubbles grow helps predict when they will burst:

Step 1 - Change: New things emerge (new technology, low interest rates, new industries). Investors believe this is the future.

Step 2 - Greed: Everyone wants in, fearing missing out. Money floods the market, prices rise rapidly.

Step 3 - Excitement peak: Prices reach irrational levels. Everyone talks about speculation. “My friend’s friend made 500% profit.” People line up to buy.

Step 4 - Smart investors start selling: Early movers realize “this house price is actually too high.” They begin to sell.

Step 5 - Panic and collapse: When enough people start selling, everyone rushes to sell. No buyers remain. Prices plummet, and the bubble bursts.

Psychological factors: Why do we fall for bubbles?

Most importantly, it’s about human psychology, not just numbers:

FOMO (Fear of Missing Out): People fear missing opportunities more than losing money. When friends profit, we rush in even without understanding.

Herd mentality: When everyone says the same thing, it seems true. “This stock will multiply tenfold.” If online communities say so, it becomes our reality.

Confirmation bias: We select information that confirms our beliefs and ignore warnings like “history shows bubbles burst in 3 years”—but this time, it’s different.

Overconfidence: “I’ll exit before it crashes. I want to be smart.” In reality, everyone waits for higher gains.

How to handle it: The billionaire’s defensive strategies

Now that we understand what a bubble burst is and how it occurs, the question is: what should we do?

Check your purpose: Are you investing because you believe in the company’s growth, or because “everyone says it will rise”? If the latter, stop.

Diversify: Don’t put all your eggs in one basket. Spread investments across different assets. When one bubble bursts, others may remain safe.

Limit speculation: Want 10x returns in a year? That’s a warning sign. If you’re suspicious, restrict your exposure to such assets.

Invest gradually: Use dollar-cost averaging—invest small amounts regularly rather than all at once. This reduces the risk of buying at the peak.

Keep cash: Having cash on hand means you can take advantage when the bubble bursts and avoid forced selling during downturns.

Learn more than listen: Before buying, research thoroughly. Understand the asset, review financial statements, analyze trends, not just rumors.

Watch for warning signs: Rapid price increases? Everyone talking about the same thing? Unusual low interest rates? These are signs to be cautious.

Summary

A bubble burst isn’t just a mathematical phenomenon; it’s a game of psychology and markets. Prices rise when everyone believes they will keep rising. When sellers start, everyone sells, and prices fall rapidly.

The key lesson: markets have moved this way before and will again. Successful investors don’t try to beat the market; they just aim to avoid the crash.

The way to prepare for a bubble burst is to get ready beforehand—diversify, hold cash, learn more, listen carefully. Remember: if home prices increase by 50% in a year, it’s not because homes got better but because we’re part of something too big to sustain.