When it comes to bubbles bursting, many people think of severe financial crises, and the market crashes. Why do these things happen, and how can we cope with them?

Actually, bubbles occur when asset prices soar beyond their true value, whether it's stocks, real estate, or even cryptocurrencies. Initially, prices rise because people believe they will continue to go up, and everyone rushes to buy for fear of missing out. The result is a feedback loop that drives prices higher and higher.

But the problem is, this kind of increase isn't sustainable. Whenever people start to realize that prices are too high, they begin to sell. And when one person starts selling, many others follow suit, causing prices to fall rapidly and sharply. That’s when the bubble bursts.

There are many real-world examples, such as the 2008 subprime mortgage crisis, which was caused by lending money to buy homes without proper standards. Foreign capital flooded in, home prices soared, but when borrowers started defaulting, the entire system collapsed. Or the 1997 Asian financial crisis, triggered by speculative real estate investments in Thailand. When the Thai baht was devalued, foreign debt surged, and the bubble burst, leading to a severe economic downturn.

Bubbles come in various types, such as stock market bubbles, where stock prices exceed the true value of companies, or asset bubbles that extend to real estate, currencies, or commodities like gold, oil, and metals. When these prices rise too high to sustain, they can fall quickly.

Why do bubbles form? Mostly, it’s due to human behavior. When interest rates are low, the economy is good, or new technologies emerge, capital flows in, prices go up, and speculation begins. Most people don’t want to miss out. Herd mentality causes everyone to jump in without thorough research. The result is a bubble that keeps expanding.

Bubbles typically go through five stages. The first is the displacement, when something exciting appears, like a groundbreaking technology. Next is the rally, where investors flood in, prices rise, and excitement builds as people believe prices will keep increasing. Then comes the euphoria, where many buy to lock in profits, and prices become volatile. Finally, panic sets in when everyone realizes the bubble is bursting, leading to a wave of selling and a rapid decline in prices.

How can we protect ourselves? First, reflect on why you’re investing. Are you investing because you understand the asset, or because you’re afraid of missing out? If it’s the latter, don’t do it. Second, diversify your portfolio—don’t put all your money into a single asset class. Third, limit speculative investments, as these tend to fall fastest when a bubble bursts. Fourth, invest gradually, using dollar-cost averaging to avoid buying at the peak. Fifth, keep cash on hand to take advantage of opportunities after the bubble bursts. And most importantly, study the market thoroughly before making any investment decisions.

In simple terms, bubbles form from prices that are artificially inflated, unrealistic beliefs, and herd behavior. When this unsustainable growth can’t continue, prices fall. So, what we should do is stay prepared, understand the market deeply, diversify risks, and avoid blindly following the crowd. That’s how you can survive a bubble burst.