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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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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