Neither Snapchat nor Instagram are creating new traffic. What they are doing is essentially stealing marketshare and user engagement from competing services like Facebook and Twitter.
Their valuation isn't their revenue potential, it's the opportunity cost to Facebook, Twitter, et al for letting them survive.
If Snapchat is stealing $1bn of monetizable traffic from Facebook, Facebook would be wised to pay some amount of money (<$1bn) to either shut it down or bring them into the fold.
There is some extra valuation here in fucking your competitor over. Acquisition of hot social media companies like this is equal parts adding monetizable traffic to your network (traffic they may have taken from you in the first place...), as well as denying your competitors the ability to do the same.
So, say if Twitter acquires Snapchat, their valuation will be some combination of ${traffic_twitter_loses_to_snapchat} + ${traffic_facebook_loses_to_snapchat} + ${value_in_denying_facebook_access_to_this_traffic}
Whether or not that's worth $3.5bn is questionable, but there is some reason behind valuing non-revenue-generating products with a positive valuation.
The main "bubble" part here is whether or not this is at all sustainable (IMO, probably not). It's pretty easy to create something that steals an appreciable amount of traffic from the incumbent social network behemoths. At these valuations the cost to "recover" these eyeballs far exceeds how much the traffic is actually worth in ad revenue.