Financial crises and bubbles: Exploring the best stories and lessons

While the pace of human advancement has fluctuated throughout history, the psychological drivers of our financial markets have remained remarkably consistent. As markets evolve and new technologies emerge, the recurring shadow of avarice inevitably appears. This drive for accumulation often decouples asset prices from reality, leading to the formation of the market bubbles we see today.

Real crises are rarely spotted until they strike. We are hardwired to predict them, yet we often ignore the obvious warning signs. This ultimately bites those who are greedy and those who chase trends too late. When the tide turns, and supply catches up with demand, yesterday’s 'obvious' investment can instantly make a genius look like a fool.

Bubbles often emerge as economic activity accelerates following periods of prosperity. This momentum tends to overinflate asset prices, turning a standard market trend into an unstoppable frenzy as people compete for the latest attention-grabbing opportunity. A defining characteristic of these financial bubbles is their ability to attract individuals who typically do not hold significant assets or participate in the markets.

Consider the classic warning sign: if your grandmother suddenly wants to funnel her retirement savings into a specific stock or new asset—despite never having dabbled in the markets before—it is a strong indication that this trend has reached mass saturation. At this stage, it is safe to assume the frenzy has gone too far. Fundamentally, a bubble stems from a collective rush to buy a trending asset at a price that far exceeds its ultimate value.

While some trends genuinely improve humanity and create unforeseen value, not all do; it is in this gap between hype and reality that bubbles most often form.

The most dramatic financial bubbles can materialize into something much worse:

Traders, corporations, banks, and financial parties can form entire systems around unstable assets, which tends to generate a cycle of greed, where fundamental value can get far lost. Unsustainable trains of buying frenzies can take the form of a multi-legged financial monster. And when this monster shows its face, things can get ugly.

This will tend to lead to a swift reversal of sentiment, with participants unable to hold their unsustainably purchased positions and being forced to liquidate them often at a high loss, as a lack of buyers can then generate a giant downward economic spiral. That is where crises happen.

Often cited as the first recorded speculative bubble, Tulipomania gripped the Dutch Republic during the 1630s. As the Dutch Golden Age flourished, the tulip became an ultimate status symbol, driving prices to astronomical heights through a frenzy of buying.

At the peak of the mania, a single bulb of tulip could reportedly fetch the price of a grand canal house or twelve acres of land.

The bubble burst abruptly in the late 1630s when an auction in Haarlem failed to attract buyers. The realization that demand had evaporated triggered immediate panic. Prices collapsed overnight, leaving traders holding worthless bulbs and wiping out vast fortunes, serving as a harsh lesson in irrational exuberance for history.

Following the exuberant speculation of the "Roaring Twenties," the 1929 Stock Market Crash stands as the most devastating financial collapse in modern history. Fueled by easy credit and a belief in perpetual prosperity, the Dow Jones Industrial Average soared to unsustainable heights, peaking in September 1929.

The market frenzy burst violently in late October. On "Black Tuesday," panic selling wiped out billions in hours. The crash triggered the Great Depression, a decade-long economic catastrophe that saw unemployment soar to 25% and thousands of banks fail.

By 1932, the stock market had lost 89% of its value, bottoming out at just 41 points from 340 points. It would take twenty-five years for the Dow to finally reclaim its pre-crash peak, marking a generation defined by financial trauma.

The 2008 Financial Crisis was a systemic failure fueled by an abundance of cheap credit and rampant speculation. Financial institutions aggressively extended capital to subprime borrowers—those with lower credit ratings and higher default probabilities—before bundling these liabilities into complex securities marketed as low-risk assets. Both uninformed investors and opportunistic corporations fueled the demand for these instruments.

However, when the underlying US housing market corrected, the value of these toxic assets evaporated. This decimated bank balance sheets and caused a seizure in global credit markets, symbolized by the collapse of giants like Lehman Brothers. The resulting global recession necessitated unprecedented government intervention, including massive bailouts and regulatory overhauls, to avert a complete collapse of the financial order.

Technology and financial bubbles have a tight relationship, as new ways to access and trade, along with emerging concepts and projects, continue to emerge.

The late 90s saw investors throwing cash at anything with a ".com" suffix, valuing unprofitable startups in the millions.

Driven by skyrocketing values, such as those of Enron or AOL, the Nasdaq soared, peaking in March 2000. But when the cheap money dried up and reality set in, the bubble burst violently. The tech-heavy index plummeted nearly 80% by 2002 as the Fed started to hike rates, wiping out trillions in wealth and leaving countless failed startups in its wake.

The Nasdaq actually broke its March 2000 peak only in 2016.

Twenty years later, the 2021 tech explosion became a playground for high speculation. Investors chased high-growth tech stocks, altcoins, and digital collectibles, such as NFTs, to extreme heights, driving now-irrelevant names to unrealistic valuations. However, the euphoria quickly dissipated as the post-pandemic reopening reduced some of the high-paced stimulus in global economies.

Over the past century, financial crises — from the 1929 Crash to the 2008 Global Financial Crisis — have shared a common DNA: cheap credit, participants' greed in a volatile market, and uncontrollable speculation.

Whether driven by "new era" tech hype (Dot-com, crypto/tech boom) or complex housing derivatives (2008), bubbles form when leverage and ecstatic sentiment decouple asset prices from reality.

Inevitably, when confidence fractures or liquidity tightens, these bubbles burst, bringing markets back to a more humbling reality.

This question is eternal among market participants.

Since the COVID-19 pandemic, asset valuation has skyrocketed due to persistent stimulus from governments, helping the economy avoid a complete collapse as the world came to a standstill.

As the economy reopened, it got extremely hot, leading to widespread global inflation. Then, inflation led to global rate hikes, which slowed the overheating activity.

Nevertheless, stock markets have rallied considerably, more than doubling since 2020.

During this 5-year period, analysts, economists, and researchers have all issued warnings about the unsustainable nature of the cycle. Between rate curve inversion, credit tightening, declining employment, and numerous other factors, investors have been confronted with multiple themes that have scared them. But financial dilution is a real thing. As more money circulates, its relative value drops, and everything else rises.

Therefore, when a revolutionary trend such as AI intersects with a substantial phenomenon of money supply, the value of assets changes drastically as to protect their wealth, investors dump "melting" cash and buy assets causing their prices to rise . This is also called the debasement trade.

Is the ongoing gigantic market rally a bubble? Only time will tell.

Valuations can become extreme, but that doesn’t mean no opportunities can arise at the same time. The essential is to respect one’s game plan and not indulge in uncontrollable leverage.

Having a “Plan B” can be a great advantage in case things change dramatically, as the most prepared and disciplined can take the most advantage of a crisis.