"And the second option is that person that might use the phrase had had high opinion about themselves and then for some reason they realised they were wrong.
Is any of those two options correct?"
Yes, to me, the second option is most likely correct. Being 'put on a pedestal' means that others hold you in high regard. If someone puts themselves on a pedestal they have a high opinion of themselves, like you say, or sets themselves up as an expert.
To say the phrase "My pedestal crumbled to dust" could be said after something that changes that opinion or situation.