Bubble characteristics and bubble volume fraction have significant effects on crater morphology and machining efficiency during EDM in liquid. Therefore, there is a need to elucidate the mechanism of bubble characteristics in EDM and analyze the mechanism of crater formation based on these bubble characteristics. However, since EDM is a transient multiphysics process, it is extremely challenging to understand the bubble characteristics by experimental methods. Therefore, the generation, expansion, explosion, and disappearance of bubbles during EDM were simulated based on a three-phase flow model in this study. The model used the phase field method to track the boundary motion, judged the existence mode of each phase according to the order parameter gradient function, and analyzed the formation of crater morphology by the gradient of surface tension in the molten pool. The motion process of bubbles, the material removal mode, and the formation mechanism of crater morphology during the pulsed discharge were analyzed by the model. The results revealed that the periodic motion of the plasma channel would drive the molten pool to produce the corresponding periodic motion, and the bubbles would grow following the periodic motion of the molten pool. The material was removed in different ways in different periods, among which the removal mode of molten splash was the predominant. The surface tension gradient inside the molten pool, the periodic motion of the molten pool, and the hydrostatic pressure in the molten region had a combined effect on the bubble motion, the flow of the molten pool, and the formation of the crater morphology.