Here's a book about the Beanie Baby bubble, and an interview with its author.

tl/dr: the creator of the toy line was constantly modifying the designs, and certain collectors wanted to get all possible designs. Consequently, the ones that were only produced for a short while, with the design just so, become very valuable in the eyes of collectors. The price crash is a sort of natural result of economic bubbles; similar things happen to housing prices, stock prices, etc. The difference is that houses and stocks are usually still worth a fair amount after the crash, but Beanie Babies are only worth as much as stuffed animals, and that's the price they reverted to.