how does an economic bubble\speculative bubble work?
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Bubbles are when the market value of an asset decouples from the intrinsic value of the asset and becomes overvalued. The specifics of why this happens depend on the bubble in question, but one common idea is what’s called the Greater Fool Theory. The idea is that a lot of people buying an asset know it’s overvalued, thus making them a fool. But they do so anyway because they believe that they’ll be able to sell the asset to a greater fool who is willing to pay even more. This chain keeps going until you eventually arrive at the greatest fool, the one who pays more than anyone else is able or willing to pay. At that point, the price has nowhere to go but down, and since the price appreciation was entirely driven by speculation rather than intrinsic worth, a dip in the price tends to cause a panic that then leads to the collapse of that price.
Now, there are a lot of other factors at play that are more about the mechanics of how markets work like excess liquidity as well as other psychological factors like overconfidence in the future value. But for speculative assets that have little intrinsic value (e.g. cryptocurrencies, NFTs, Beanie Babies, etc.), it’s usually a greater fool scenario.
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