How a bubble works: the general pattern
· beginner
Automated material · TradeAlmanac editorial deskDraft prepared by a language model from our stored data; not reviewed by an editor.
Bubbles differ by asset and by era and coincide in structure.
The stages
First a real basis appears: a new technology, a new market, a change of rules. The rise is justified.
Then money arrives, drawn by the rise. The price grows faster than the basis changes.
An explanation appears for why the old valuation rules no longer apply. That is the key sign: the rise requires a new theory.
The inflow slows — there is nobody left to buy. The price stops rising, and the first sales trigger the rest.
What separates a bubble from growth
Not the pace but the link to the basis. Rising profit justifies a rising price; a rising price with unchanged profit does not.
The role of leverage
Borrowed money accelerates both phases: the rise is fed by purchases on credit and the fall is amplified by forced closures — Why leverage ruins the result even when the forecast is right.
What protects
Not prediction but portfolio construction: a share of the asset capped in advance and a rebalancing rule that sells what rose automatically — Rebalancing: returning to the target weights.
Related: Herd behaviour: why a crowd is convincing and Survivorship bias: why success statistics mislead.
Related instruments
Draft prepared by a language model from our stored data; not reviewed by an editor.
Model: claude-opus-5
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