Bubble Burst: A Repeating Phenomenon and How to Protect Yourself

When it comes to bubbles bursting, many investors immediately feel anxious because this phenomenon often leads to heavy losses, market crashes, and general worry. Bubbles don’t burst overnight; they are the result of long-term market cycles that start with hope and end with heartbreak and financial loss.

When Do Bubbles Burst? Understanding the Spread System

A bubble bursts when asset prices (such as stocks, real estate, or cryptocurrencies) rapidly rise above their true value. This surge is often driven by investors rushing to buy, believing prices will keep climbing, even when reality suggests otherwise.

Initially, bubbles form due to favorable economic factors like low interest rates, new technological discoveries, or good business management. These factors attract investors to buy these assets, increasing demand and prices. However, when prices deviate too far from their intrinsic value, the imbalance becomes unsustainable.

Speculation and Overconfidence: The Engines of Bubbles

Speculation involves investing for short-term gains without regard to the actual value. It’s like throwing money into a pond, hoping to be the last to get out before it drains. As more investors join in, a positive feedback loop occurs: prices go up → investors see profit opportunities → more buying → prices rise further.

Overconfidence among investors is another key factor. Some tend to believe only information supporting their views and ignore warning signs. This “confirmation bias” causes bubbles to inflate further until prices become irrational.

The Five Phases of the Bubble Cycle

Bubbles don’t burst from a single signal but from a combination of events in sequence:

1. Market Movement: Introduction of exciting new technology or investment opportunities, like the internet or new financial products.

2. Boom Phase: Capital floods in as investors fear missing out (FOMO), pushing prices higher.

3. Euphoria: Investors become euphoric, dreaming of endless gains. They believe the trend will continue forever, investing even more and inflating the bubble to its peak.

4. Profit Taking: Some investors start to sell to lock in gains, recognizing that prices are no longer justified. This causes volatility.

5. Panic: As more realize the overvaluation, panic selling ensues, leading to a rapid collapse of prices.

Asset Bubbles: Stocks, Commodities, and More

Bubbles aren’t limited to stocks. They frequently involve various assets:

• Stocks: When prices soar beyond reasonable profit and valuation levels.
• Real Estate: When property prices escalate beyond what buyers can afford.
• Commodities: Gold, oil, industrial metals can bubble due to speculative trading.
• Currencies: Both fiat (USD, EUR) and digital currencies (Bitcoin, Litecoin) can experience bubbles.

The occurrence across different asset classes shows that risk isn’t confined to one market.

Warning Signs and Strategies to Protect Yourself

The best way to protect yourself from a bubble burst is to make informed investment decisions:

• Be Mindful: Ask yourself if you’re investing because you understand the asset or just to avoid missing out.
• Diversify: Don’t put all your eggs in one basket. When one bubble bursts, other parts of your portfolio may remain safe.
• Invest Gradually: Use dollar-cost averaging—invest fixed amounts over time instead of all at once. This way, you can benefit from lower prices if a bubble pops.
• Watch for Red Flags: Excessive hype, easy profits, high leverage, and constant discussions about a single asset are warning signs.

Lessons from History: Past Bubble Events

History offers many lessons about bubbles:

• 1997 Asian Financial Crisis: Thailand’s real estate bubble burst after a period of rapid growth fueled by foreign investment and high interest rates. When the Thai baht devalued in July 1997, the bubble burst, leaving many investors unable to repay debts.

• 2008 Subprime Mortgage Crisis: Excessive lending to borrowers with poor credit led to a housing bubble in the US. When the bubble burst, it caused a global financial crisis, with losses totaling billions of dollars.

Understanding these events helps us recognize similar patterns today.

Summary: Deep Understanding for Better Preparedness

Bubbles form when asset prices exceed their true value due to speculation, overconfidence, and herd behavior. No bubble bursts without warning; awareness and preparation can significantly reduce losses.

Your first step should be to deeply understand bubbles, study market history, question your investment motives, and monitor warning signs. With caution and wisdom, you can better protect yourself from the risks of bubble bursts.