Understanding Market Booms and Busts Cycles: Why the Rich Get Richer and You Lose

Introduction

Are you hesitant to get into skyrocketing Stock and Crypto prices? Well, you should be, because asset prices tend to bubble and eventually pop, leaving many uninformed or novice investors with massive losses while only the smart investors take a lion's share and get out of the market with huge profits.

This is one of the main reasons why the rich get richer and the poor get poorer. Why? Because the rich are financially smart, they make smart moves with money that leaves the middle income and low-income earners helpless wondering what happened to their money when it comes to risky investments. 

But don't worry, by reading this article, you will understand why market bubbles form and what causes them to pop. If you read this article, consider yourself lucky because I'm going to teach you some insights that you won't find easily online.

Before we jump into how bubbles form and what causes them to pop, let's first understand what really happens in a financial market crash.

What Really Happens in a Market Crash or When a Market Bubble Pops?

Have you ever seen headlines screaming that the stock market crashed, wiping out trillions in a single day? Or breaking news reports claiming millions of investors lost their hard-earned money in stocks, assets, or cryptocurrencies?

But have you ever stopped to wonder—where does that money actually go? Does it simply vanish into thin air? Of course not. If some people lost money, someone else must have gained it. So, who really ends up with that wealth?

The truth is, in a market crash, financially illiterate investors lose money to those who are financially smart. The rich - institutions, insider traders, and seasoned investors understand market cycles and have access to critical information that the average person either overlooks or simply doesn’t have.

Market crashes don’t erase money; they transfer it. When bubbles burst, wealth shifts from emotional, uninformed investors to those who are patient, strategic, and financially educated. That’s why the media reports that millions lost money, but the reality is that only a few who truly understand the game ends up walking away richer.

However, in a market crash big institutions could go bankrupt, this can be due to taking uncalculated risks, but at the end, those who are prepared and informed wins!

How Market Bubbles Form: The Bubble Triangle

According to William Quinn and John Turner, well-respected professors in the field of finance, a financial bubble is similar to a fire. Just as fire requires oxygen, fuel, and heat to spread, every financial bubble requires three key elements: marketability, money /credit, and speculation.

1. Marketability - Oxygen

This refers to the ease of buying and selling an asset. The marketability of an asset is considered to be high if the asset has:

- Low barriers to purchase the asset: The ease of finding a buyers/sellers coupled with less/no paperwork makes the asset quite easy to purchase.

- The asset has legal clarity: This allows news media companies to freely promote it.

- The asset is divisible and therefore widely accessible: This makes the asset affordable to anyone as the asset can be bought by small units instead of the whole piece.

 

2.Money and Credit - Fuel

This refers to the access of easy money. Easy money can flow into the hands of people when:

- Interest rates are low: Low interest rates make borrowing very cheap

- Banks are deregulated: Deregulation allows banks to provide risky loans to people and also invest in risky speculative assets injecting cash into the economy.

3. Speculation- Heat

This is when people buy assets not because of their real value but simply because they expect prices to keep rising.

- Speculation is often driven by greater fools' theory which an asset's price is not based on intrinsic value but rather on the belief that someone else (a "greater fool") will buy it at a higher price.

The Spark to create the Bubble

Finally, we need the spark to blaze the fire. This spark in financial markets can be many things and often is a mystery, but commonly, this spark can be a technological innovation or government policy or something that is huge that can have a profound effect on the financial markets.

How Marketability, Money/Credit and Speculation Align with every Historical and present-day financial Bubbles.

We will now see how these 3 elements helped for historical and present-day bubbles to form with real examples so that you can discover how accurate these facts are.

The Mississippi Bubble in France -1720

The Mississippi Bubble (1719–1720) was triggered by France’s massive debt crisis. To fix this, the government gave John Law, founder of General Bank in France, control over national finances. Law introduced paper money and created the Mississippi Company, promising huge profits from American territories. This sparked a speculative frenzy, leading to one of history’s biggest financial collapses.

1️. Marketability (Easy Buying & Selling)

• Shares of the Mississippi Company were easily tradable, making it simple for people of all social classes to invest.
  
  
• Law’s General Bank allowed investors to buy shares using newly printed paper money, increasing accessibility.
  
  
• The Mississippi company had ties with the French government, the government controlled the news media, and the Mississippi company took this advantage to encourage people to invest.

2️. Money & Credit (Excess Liquidity)

• John Law printed massive amounts of paper money more than the actual gold reserves, inflating the economy artificially with fake paper money.
  
  
• Easy credit and loans encouraged people to buy more shares, even with borrowed money. 

3️. Speculation (The Madness of Crowds)

• Rumors of gold and silver in the Mississippi territory fueled irrational investor enthusiasm.
  
  
• Share prices skyrocketed 20x, as people believed they would become wealthy overnight.
  
  
• The hype created by the news media companies made FOMO (Fear of missing out) among people.
  
  
• John law also used some tricks to keep the share price rising for example, each time new shares were issued, investors had to hold onto existing shares. This requirement increased demand for those existing shares, which in turn pushed up their prices on the secondary market.
  
  
• The share price of the Mississippi company went from 140 French livres in 1717 to over 10,000 livres two years later!

How the Mississippi Bubble Popped?

• When investors tried to cash out, they realized there were not enough gold reserves to back the paper money. Confidence collapsed, triggering a mass sell-off.
  
  
• Law’s paper money lost value, leading to a massive economic disaster for France.

💡 Lesson: The Mississippi Bubble proves that easy market access, excessive money supply, and speculation can create powerful financial booms—before they inevitably collapse. 

2. Japan's Asset Bubble (Late 1980s – Early 1990s)

The Japanese asset bubble was a period of extreme speculation in stocks and real estate, fueled by cheap credit, overconfidence, and excessive risk-taking. At its peak, Japan’s stock market and real estate values were the highest in the world. But when the bubble popped, Japan entered a period of stagnation known as the "Lost Decades."

1️. Marketability (Easy Buying & Selling)

• Stock trading became widely accessible, leading to a surge in new investors.
  
  
• Banks aggressively lent money to companies and individuals, encouraging more speculation.
  
  
• Real estate speculation exploded, with properties being bought and sold rapidly for profit.
  
  
• Small plots of lands in urban areas were bought and repackaged into one plot and sold at a large profit for corporations for commercial projects.
  
  
• Japan’s economic strength and global dominance in industries like automobiles and electronics fueled confidence that prices would never drop.

2️. Money & Credit (Excess Liquidity)

• The Bank of Japan (BOJ) kept interest rates low, making borrowing extremely cheap.
  
  
• Japanese companies borrowed heavily and used real estate as collateral to buy even more assets, creating a dangerous cycle.
  
  
• Banks relaxed lending standards, offering loans without proper checks, causing massive debt-fueled investments.
  
  
• The government allowed unlimited credit expansion, flooding the economy with excess liquidity.

3️. Speculation (The Madness of Crowds)

• Real estate prices skyrocketed – In 1991 total land value in Japan was around $20 trillion – five times the value of all the land in the United States at the time
  
  
• The Nikkei 225 stock index surged from 10,000 (1984) to nearly 39,000 (1989).
  
  
• Japanese companies became the most valuable in the world, with valuations far exceeding their real earnings.
  
  
• A belief spread that Japan’s economic growth would never stop, leading investors to blindly chase higher prices.

How the Japan's Asset Bubble Popped?

• In 1989, the Bank of Japan raised interest rates, making borrowing more expensive and slowing investment.
  
  
• Stock prices collapsed first – the Nikkei 225 crashed from 39,000 (1989) to 15,000 (1992), wiping out trillions.
  
  
• Real estate prices plummeted by over 70%, leaving banks and companies with massive bad debts.
  
  
• Many banks became insolvent, but the government bailed them out, creating "zombie banks" that slowed economic recovery.
  
  
• Japan entered decades of economic stagnation, with deflation and slow growth persisting even today.

💡 Lesson: Japan's asset and stock bubble was caused due to political reasons. The Japanese government created the spark by lowering interest rates and encouraging credit, this created enormous amounts of money for speculative investments. 

Japan’s asset bubble shows that cheap money, excessive speculation, and overconfidence in economic growth can create unsustainable booms—but they always end in financial disaster. 

3. The Subprime Mortgage Bubble (2007-2008)

The subprime mortgage bubble refers to the period leading up to the 2007–2008 financial crisis, when the US housing market inflated due to risky lending practices, excessive borrowing, and speculative investments. In the end, the bubble burst, triggering the global financial crisis that led to widespread economic destruction.

1️. Marketability (Easy Buying & Selling)

• Homeownership was marketed as an accessible goal for everyone, leading to an explosion of homebuyers, even those with poor credit histories (subprime borrowers).
  
  
• Financial institutions encouraged home buying with low or no down payments, adjustable-rate mortgages, and enticing offers to first-time buyers.
  
  
• Mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) allowed banks and investors to package and sell mortgages, increasing liquidity and encouraging further risk-taking.
  
  
• Real estate speculation boomed, with home prices rising rapidly, driven by increasing demand for properties and the idea that housing values would continue to rise.

2️. Money & Credit (Excess Liquidity)

•  The Federal Reserve maintained low interest rates in the early 2000s, making borrowing cheaper and fueling a housing boom.
  
  
• Financial institutions, such as banks and mortgage lenders, began to loosen lending standards, offering loans to subprime borrowers who otherwise wouldn’t have qualified.
  
  
• The ease of borrowing created an environment of reckless lending, with no proper verification of borrowers' ability to repay their loans.
  
  
• Investment banks and hedge funds actively packaged subprime mortgages into MBS, and these were sold to global investors falsely marketed as risk free, creating a flood of risky credit in the market.

3️. Speculation (The Madness of Crowds)

• Home prices skyrocketed in many US cities, with some regions seeing price increases of 100% or more in just a few years.
• Investors and banks bet on the continued rise in home prices, using MBS and CDOs to leverage their positions and make high-risk, high-reward investments.
• People took out risky adjustable-rate mortgages, assuming they could refinance later or sell their property at a higher price before interest rates rose.
• Speculation was rampant, with many believing that housing prices would continue rising indefinitely, creating a housing bubble similar to previous asset bubbles.

How the Subprime mortgage Bubble Popped?

• In 2006, housing prices began to level off and decline, but many homeowners with adjustable-rate mortgages found themselves unable to make higher payments as interest rates reset.
  
  
• Mortgage defaults surged, particularly among subprime borrowers who had been offered loans they couldn’t afford.
  
  
• As defaults rose, the value of MBS and CDOs, tied to these risky mortgages, began to plummet, leading to massive losses for banks and investors.
  
  
• The collapse of Lehman Brothers in September 2008 triggered a global financial panic, as banks were unwilling to lend, and the value of assets related to housing collapsed.
  
  
• The US government and Federal Reserve intervened with massive bailouts and stimulus packages to stabilize the financial system.

💡 Lesson: The subprime mortgage bubble reveals the dangers of excessive lending, poor risk assessment, and financial products designed to profit from speculative investments. 

It shows that easy credit, unrealistic assumptions, and the belief that markets always go up can create massive financial risks, eventually leading to widespread economic collapse. The crisis underlined the importance of regulation and responsible lending in maintaining financial stability. 

4. The 2021 Crypto Bubble – A Historic Rise and Fall

The 2021 crypto bubble was one of the largest speculative booms in financial history, fueled by retail and institutional adoption, excessive leverage, and euphoric market sentiment. At its peak, the total crypto market cap surpassed $3 trillion, but when the bubble burst, it wiped out trillions in value and led to the collapse of major projects and companies.

1️. Marketability (Easy Buying & Selling)

• Cryptocurrencies became widely accessible, with centralized exchanges (Binance, Coinbase, etc.) making it easy for anyone to buy, sell, and trade digital assets.
  
  
• Decentralized finance (DeFi) platforms enabled lending, borrowing, and yield farming with little regulation, encouraging excessive risk-taking.
  
  
• NFTs (Non-Fungible Tokens) surged in popularity, with digital art, collectibles, and virtual land selling for millions of dollars.
  
  
• Meme coins like Dogecoin and Shiba Inu gained massive followings, fueled by social media hype and celebrity endorsements.

2️. Money & Credit (Excess Liquidity)

• The COVID-19 pandemic led to massive government stimulus programs, flooding financial markets with excess liquidity.
  
  
• Low interest rates and an abundance of cheap money encouraged investors to pour funds into high-risk assets, including crypto.
  
  
• Leverage trading became widespread, with traders borrowing heavily to amplify their bets, leading to unsustainable price increases.
  
  
• Venture capital firms invested billions in blockchain startups, further inflating valuations and speculation.

3️. Speculation (The Madness of Crowds)

• Bitcoin reached an all-time high of $69,000 in November 2021, with many believing it would soon surpass $100,000.
  
  
• Altcoins experienced exponential gains, with some tokens increasing 100x or more in just months.
  
  
• DeFi and NFT projects promised massive returns, attracting both institutional and retail investors looking for quick profits.
  
  
• Speculative mania was driven by social media influencers, celebrity endorsements, and retail FOMO (fear of missing out).

How the Crypto Bubble Popped?

• The Federal Reserve signaled interest rate hikes in late 2021, reducing liquidity and making speculative assets less attractive.
  
  
• Bitcoin and altcoins started declining, triggering mass liquidations of leveraged positions, further accelerating the crash.
  
  
• The Terra (LUNA) ecosystem collapsed in May 2022, wiping out $60 billion and shaking confidence in crypto markets.
  
  
• Major firms like Three Arrows Capital, Celsius, and FTX went bankrupt due to bad loans, mismanagement, and exposure to risky assets.
  
  
• By the end of 2022, the total crypto market cap had fallen below $800 billion, marking an 80% decline from its peak.

💡 Lesson: The 2021 crypto bubble proved that excessive speculation, leverage, and market euphoria can lead to extreme booms and busts. Just like previous bubbles, unrealistic expectations and easy money created an unsustainable market. 

The crash reinforced the importance of risk management, due diligence, and long-term value over short-term hype. 

Final Thoughts

While I've mentioned only a few examples, there have been plenty of other market bubbles and busts, such as the dot-com bubble and the Chinese bubble. It's important to note that not all market booms are inherently bad. For instance, the dot-com bubble, despite its burst, led to major improvements in the tech sector, with new technologies and companies emerging from it. 

These market bubbles and busts occur when the three key elements—marketability, speculation, and money/credit—align perfectly, creating an environment where asset prices are artificially inflated. This lures people into taking unnecessary risks, often leading to significant losses, sometimes even wiping out all of their savings.

Remember that if you lack financial education and don't understand how financial markets work, you are the perfect target for the rich to take your hard-earned money. Investing in an asset as a late buyer, driven by emotions rather than knowledge, often leads to losses. The majority who follow hype and fear will lose their money to the few who think strategically and act with a clear mind.

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.