The bursting of bubbles is a phrase that truly makes investors uneasy. When people hear this term, they immediately think of financial crises, economic collapse, and the loss of massive amounts of money.

A bubble bursts when the prices of assets—such as stocks, real estate, or crypto—rise above their actual intrinsic value. Generally, this is driven by speculation, investors’ overconfidence, and the belief that prices will keep going up forever.

But the key point is that prices cannot rise endlessly. Eventually, reality catches up: the bubble bursts, and prices drop so quickly that many investors are caught off guard.

There are clear examples throughout history, such as Thailand’s Tom Yum Goong crisis in 1997. At that time, the real estate market was overheated. Interest rates were high, yet investors still rushed in. When the Thai baht was devalued and the market was highly leveraged, the bubble burst suddenly. Real estate prices plummeted sharply. Investors who had borrowed money were unable to repay their debts, and the economy suffered a severe downturn.

Or consider the U.S. subprime crisis in 2008. Financial institutions approved home loans for people who were not actually able to repay. Investors rushed to buy homes in order to speculate. Financial instruments tied to these loans became popular. The market grew rapidly, but when borrowers began to default, the entire system collapsed. Bad debt across financial institutions worldwide reached $15,000 million.

Bubbles come in many types. Stock market bubbles are caused by stock prices surging beyond the true value of the companies. Asset bubbles are broader, including real estate, currencies, and even commodities such as gold, oil, or industrial metals.

There are many factors that cause a bubble to burst. Low interest rates stimulate borrowing and investment. New technologies or new products attract investors. A shortage of assets drives prices higher—but the most important factor is investors’ behavior: herd mentality, excessive confidence, and the belief that they can exit the market before the collapse happens.

Bubbles usually go through 5 stages. First is the shift that occurs when something exciting and new appears. Next comes the rising phase, when investors rush in because they fear missing out. Then comes a feeling of excitement when prices reach levels that are not sustainable, but investors remain confident. After that is profit-taking, when some people realize that prices have risen too high. Finally, panic sets in when everyone knows the bubble is about to burst, leading to frantic selling and a rapid drop in prices.

So, what can we do to protect ourselves?

First, review your investment goals. Are you investing genuinely, or are you just following the crowd because you’re afraid of missing out? If it’s the latter, you may be contributing to the formation of a bubble.

Second, diversify your investments. This is the best way to protect yourself—don’t put all your eggs in one basket.

Third, limit speculative investments. These assets are often the first to see their prices fall sharply when a bubble bursts.

Fourth, invest gradually. Don’t put all your money in at once. Use dollar-cost averaging instead. Investing small amounts over time can help you avoid buying at the peak.

Fifth, keep cash reserves. Having cash on hand allows you to take advantage of buying opportunities after a bubble bursts, and it acts as a safety net if you need to sell during an economic downturn.

Most importantly, understand the market. Follow information and do your research before making any investment decisions.

In summary, bubbles burst because prices rise far above their true value. When investors rush to buy because they believe prices will keep climbing, the bubble inflates—but this excess can’t continue indefinitely. Eventually, people realize the valuation is inflated, demand declines, and once investors start selling, prices fall rapidly.

This happens again and again throughout history because the factors that create bubbles come from human behavior—something that is difficult to control. What we should do now is prepare ourselves: diversify risk, increase income opportunities, and study the market so we understand it better.