The era of bursting bubbles has arrived, and we hear this phrase more and more often. Every time we hear it, we know that a severe financial crisis is about to happen. Economic downturns and massive money losses follow. A bubble bursts when asset prices rapidly exceed their true value, followed by a sudden plunge.

It is a recurring economic cycle throughout history. Price inflation results from speculation, investor overconfidence, and herd mentality. Everyone believes that prices will keep rising. But when reality sets in and the bubble bursts, prices fall sharply.

Looking at past examples, we can clearly see how impactful this bubble burst can be. In 2008, the subprime mortgage crisis caused by the real estate bubble in the United States led to a global financial crisis. Financial institutions worldwide suffered damages, with bad debts reaching $15 billion. This was due to loose mortgage approvals for borrowers unable to repay. Money flowed into the real estate market, home prices soared, and mortgage-backed securities became popular.

In Thailand, the 1997 Tom Yum Goong crisis is a clear example of a bubble burst. At that time, interest rates were very high, but the real estate market was booming. Investors saw it as a quick profit opportunity. Foreign capital flowed in to capitalize on growth. Property prices rose unsustainably. When the baht was devalued on July 2, 1997, foreign currency debt skyrocketed. The bubble burst, property prices plummeted, and borrowers with high leverage couldn’t repay their debts. The Thai economy plunged into a severe recession.

There are many types of bubbles. Stock market bubbles occur when share prices exceed the true value of companies. Asset bubbles expand to real estate, currencies—both traditional currencies like dollars and euros—or digital currencies like Bitcoin and Litecoin. Credit bubbles happen when lending expands rapidly. Commodity bubbles occur when prices of gold, oil, metals, or agricultural products spike uncontrollably.

Why do bubbles burst? Mostly, it starts with good economic factors: low interest rates encourage borrowing and investment. New technologies or products attract investors. Asset shortages push prices higher. But these factors turn into bubbles when investors see rapid growth. They rush in for fear of missing out. Speculation and trend-following investments cause prices to diverge from their true value.

The problem lies in psychological behavior. Herd mentality makes people follow others without fully understanding. Investors believe they can exit the market before it collapses. Cognitive dissonance leads people to ignore warning signs and only accept information confirming their beliefs. All these factors contribute to the expansion of the bubble.

Bubbles typically go through five stages. The first is the shift when something new and exciting appears, such as innovative technology or industries expected to transform the economy. The second is the upward trend, where investors flood in for fear of missing out, money flows in, and prices rise. The third is the excitement phase, with investors believing prices will continue to increase. The fourth is profit-taking, when some investors realize prices are high and start selling. The final stage is panic, when many realize the bubble is bursting. A wave of selling ensues, prices fall rapidly, and the bubble officially pops.

If you're concerned about a bubble burst, there are several ways to protect yourself. First, review your investment objectives. Are you investing out of fear of missing out, or because you truly understand the asset? If it’s the former, you might be contributing to the bubble. The best approach is to diversify your portfolio to reduce risk from any one asset class.

If you suspect a bubble is forming, limit exposure to speculative assets, as these tend to be the first to drop sharply when the bubble bursts. Invest gradually rather than all at once. Consider dollar-cost averaging—invest small amounts over time. This helps avoid buying at the peak. Keep cash reserves; having cash on hand allows you to capitalize on opportunities after the bubble bursts.

Most importantly, acquire knowledge. Follow market information where you invest. Always research before making investment decisions. Bubble periods are part of market cycles, but with proper preparation and understanding, you can reduce your risks.