From what understand, money doesn’t just disappear. When you’re at a poker table playing, the sum of money everyone started with is the same at the end(when someone loses $100, other(s) gain $100). If I sell you a crypto for $100 and it drops to $0, I would still have your $100. In this case, wouldn’t someone/some groups of people get all the money that is currently being lost?
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Here’s an explanation
I sell lemonade. It’s a cool day. I sell a glass for $1. It’s a hot day, I sell it for $4. It’s warm, I sell it for $3. The price varies but I can sell it sell for whatever people are willing to pay
*Breaking news*: drinking lemonade causes you to uncontrollably fart blood. Do not drink.
Today, no one bought my lemonade. They probably never will again, because of the whole blood fart stuff. My lemonade is now worth $0
It never existed in the first place.
I print a thousand pieces of paper and call them “blahbucks”. I sell one blah buck for $100 and stuff the rest in my piggybank. Now I can claim that I have 999 blahbucks in my piggybank, which is worth $99,900.
Except I don’t actually have $99,900, I have 999 blahbucks which is not the same thing. And if that one person I sold it to was the only person willing to spend $100 on a blahbuck, I’m not getting $99,900 for the rest of them. If I have to sell the next one for $50, I can now only claim that the rest of them are worth $49,900. $50,000 of “value” disappeared.
The same thing is true for commodities other than Crypto. Jeff Bezos may have “$100 billion in Amazon stock” but if he tried selling it all at once, he wouldn’t get anywhere close to $100 billion for it because there’s not that many people looking to pay that price for Amazon stock.
There are two different but related things happening.
Some crypto exchanges are ponzi schemes. People spend money to buy “crypto”. The website shows them a number that represents how many coins you have. That number keeps going up exponentially, but it’s just fake. They haven’t really invested any coins in the market at all.
Suddenly, it collapses. People get jittery and decide to withdraw all of their crypto as cash. The first few lucky people are able to do so, they come out ahead – for example, one person invested $1 million a year ago, they withdraw $2 million. But then the money runs out. Everyone else is left with nothing.
When this happens, it tends to drag the price of all crypto down, but that’s not quite the same.
The price of one Bitcoin at the beginning of the month was about $20k. The price of one Bitcoin today is around $16k. So if you’re holding a lot of Bitcoin, it’s worth less.
Where did that money go? Well, if you look at it in terms of dollars, you gave your dollars to someone else when you bought a bitcoin for $20k. Now they have $20k and you have one Bitcoin. If you sell a Bitcoin today for $16k, someone else has one Bitcoin and you have $16k. No US dollars were created or destroyed. All that happened is that the value of one Bitcoin changed. It’s no different than buying a car for $20k and it only being worth $16k when you try to sell it later.
What happen is that they created value out of thin air to begin with. They said ‘tell your computer to use up electricity grinding these mathmatical formula and we will pay you in fake dollars, aka bitcoins’
People did it and lots of them amassed tons of bitcoins.
Now people started using bitcoins to buy and sell drugs, to avoid taxes, to send money back home without using normal currency exchanges, and even buying subway sandwiches.
The value of these fake coins started going up, investors saw an opportunity and put real money in, driving the exchange rate on bitcoins and other fake money even higher.
All along they have made it difficult to cash out of bitcoins and because the value kept going up there was little incentive to cash out.
But fundamentally if you look at the total number of coins ever minted and multiply that by the exchange rate you would get a value astronomically higher than the total amount of real dollars that has been invested in bitcoin (applies to all crypto)
So what you have is sort of like a bank that let people earn free digital money vouchers in their accounts but the bank never actually had that money and if/when people start to come to this realization and they all try to get their money out the bank can’t possibly make good on it and everyone trying to withdraw cash from the ATM only gets a tiny fraction of what they thought they had.
Person A mines a coin
Person A sells it to person B for $1. Person A made $1
The price goes up. Person B sells it to person C for $5. Person B made $4.
The price sky rockets. Person C sells it to Person D for $100. Person C makes $95.
The market crashes. Person D sells it to Person E for $0.01. Person D loses 99.99$.
Add up all the money gained and lost (including Person E who is down a cent for buying it), and it totals to 0. No value was created or lost. Just shifted around. This is one of the reasons many people dislike crypto. In order for one person to make it big, someone else needs to lose it big.
It probably never existed in the first place. It’s not so much of a tangible loss as opposed to an opportunitsic loss.
Let’s say I have 1000 baseball cards of a baseball player.
I see on ebay they are selling for 100 dollars each, so I think to myself, I must have 100,000 dollars since I have 1000 cards each worth 100 dollars each.
Next day this baseball player hits a 1000th home run and now his baseball card is selling 1000$ a piece on ebay. Now I am a millionaire.
A week later, this baseball player murders someone. Now nobody wants his baseball card anymore and they sell for 1 dollar on ebay. Now I just lost 999,000 dollars.
That pretty much sums up the cryptocrash.
You make a coin
You buy millions of that coin
You hype it up on your cryptobro subreddit and youtube and get millions of people to buy it.
As long as more people buy it than sell it the price will keep going up.
You sell all the crypto at once tanking the price of the coin, but you get rich.
Nowhere. The money extracted from it by early adopters has been transferred into assets with real value, the rest goes up in a puff of smoke. That’s what happens with *any* Ponzi scheme: The early adopters can profit, or get their money back, by taking the money from people who came along later.
And Crypto **IS** a Ponzi scheme, that’s all. It *may* have been intended to be a viable currency, but in order to be a currency, you need to be a stable store of value, and crypto has **NEVER** been stable, which makes it completely unsuitable as money.
So, why did people stay in Crypto, when everyone knew it was never going to replace government-backed currencies? Because as long as the price was going up, everyone wanted to ride the wave to earn money for doing no work, and pass on these worthless cryptographically signed ledger entries to a greater fool, and it turns out the people who are holding them now **WERE** the greater fool.
Poker as you describe it is a “zero-sum game” – whatever is lost by one player is gained by another.
The real world doesn’t work like that. I’m a plumber with a car that won’t start. You’re a mechanic with a leaky sink. It’s trivial for me to solve your problem or you to solve mine, but we can’t solve our own problems. If we trade services we are both richer than before. So value can be created.
But sometimes that value only exists in our minds. Securities and so forth are valued at the price during the last actual transaction. When something is highly desirable people bid more for it, the price goes up, we say it is “worth” more. It loses desirability, people are unwilling to pay the high price, it’s “worth” goes down.
I have a shiny Charizard card, which everyone wants. You buy it from me for $5. People will say it’s “worth” $5 or it’s “going for” $5. I decide I want it back, but you don’t give it up easily, so I pay you $10 for it. Then you realize how much you really like that card and offer me $15 for it, which I take. Then I realize this card is a great investment since I make money every time I buy it and then sell it, so I offer you $20 which you take. Then I try to sell it back to you, but you’re not as dumb as I am plus there’s some foil You-gi-oh card you want, so you are not interested. I look around and the only other buyers have lukewarm interest and are only willing to pay a dollar. So I sell it for a dollar. I have lost $19, but it didn’t go anywhere. The other part of the “worth” was in our desire to own the card, which has evaporated.
Prices are a popularity contest. Something loses popularity, it’s price changes, what people say it’s “worth” changes.
Decode sentences with the word “worth” very carefully. “Price” has a meaning, it’s what someone just paid for something, is willing to pay for something, or is willing to sell something for. Value has a more nebulous meaning, and it’s subjective, different people can value something differently. But “worth”, in practice, is a treacherous word and people use it carelessly, causing confusion.
Let’s go with poker chips.
Suppose I start a new casino, and sell people chips to play poker. However, I only sell a fixed amount of chips, and carefully track who has them. Also, I don’t buy the chips back – but I will facilitate you selling them to someone else; though I take a small percentage of the price. To keep people coming back, I give out bonuses – every game you win, I pay you in cash; based on the size of the pot and how much chips are selling for.
My idea takes off. I initially sell the chips for $100; but soon people are paying $10 000 for the chips – every chip is worth $10 000. Money is flowing, people with the chips are rich.
Then something happens. Maybe I get exposed rigging games for my friends. Maybe the IRS comes after me for tax money. Maybe people just decide my casino isn’t hot. Whatever it is, nobody plays any more. Those chips become worthless – and all the money they represent disappears. If there’s a million of those chips out there, that’s ten billion of value that just disappears
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Things get to be more of a problem when that value reaches into other things.
Suppose you had 50 chips at the height – half a million dollars – and borrowed money to buy a house using the value of the chips as collateral. When the chips become worthless, you have to sell that house because you don’t have the money any more. But because you had to sell fast, you don’t get as much money; and end up declaring bankruptcy. All told, instead of the $2 000 000 you borrowed, you only pay the bank back $1 250 000 after going through bankruptcy – an extra $250 000 of value that disappeared.
In the case here, a big part of the problem is that other casinos valued their chips in my chips – maybe a cheap casino would give 100 chips for my chip; while a high-end casino might take 100 of my chips for one of theirs. With other casinos having their chips tied to the value of my chip, when I collapse, ALL of them collapse – and with them, all of the value they represent. If it’s bad enough, there might be other casinos with the same idea that people think will follow my casino, even if they didn’t tie their chips to mine – and so people start selling those chips; which also lowers the total value of everything.
And all that money lost adds more chances of cases like the hypothetical you: people who invested based on the value of the chips, and had to sell fast (and cheap) for money. It all adds up.
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So that’s how value disappears. It’s not money (though that can disappear too – but that’s a different explanation); but rather value that disappears. And since we count wealth as everything with measurable value, that wealth disappears when value like this drops.
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