How a bubble works: the general pattern

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Automated material · TradeAlmanac editorial deskDraft prepared by a language model from our stored data; not reviewed by an editor.

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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.

Not the pace but the link to the basis. Rising profit justifies a rising price; a rising price with unchanged profit does not.

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.

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.

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How this material was prepared

Draft prepared by a language model from our stored data; not reviewed by an editor.

Model: claude-opus-5