how does an economic bubble\speculative bubble work?
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This is actually a subject of some debate among economists, but here are the absolute basics. All assets, to some degree, are traded because they are expected to return some value in the future (If they did not, you’d be buying them solely for what they’d offer you now, and they wouldn’t be assets, they would be commodities). However, it is impossible to perfectly know what will happen in the future, so there is some guesswork involved in evaluating assets. Most of the time, some people are a little optimistic, others pessimistic, and the end result is that the future value of the asset is accurately represented in the price of the asset. However, in a speculative bubble, whether by chance or due to some popular misconception, there are more optimists than pessimists, and this causes the price of the asset to be overvalued. In some cases, since this initially pushes the price up, it can be self reinforcing, and people will see the current rise in price as validating the asset’s worth, and they start buying, further feeding into the problem. This can only go on for so long though, as eventually the future becomes the present, and the asset’s true worth is revealed. At this point, the price is far higher than what the asset is worth, and the bubble pops, as no one is willing to buy at the inflated prices of before.
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