$200B wiped off crypto market over the weekend

There is a fundamental ratio between actual productivity and money. If new money is greater than productivity, then over time stuff is worth more. If productivity is greater than new money, then over time money is worth more. You typically hear about this when we talk about 'deflationary spirals'. What's more typical in today's world is the first scenario. When that happens and stuff is worth more, since we know that new money will keep showing up, it's not consumptionary stuff that is worth more, but assets like stocks and houses. So even though the money supply is growing, you don't see any inflation.

As those assets are worth more, they quickly reach their 'true value' and start to bubble up above it. But once the bubble point is reached, true value no longer matters. So APPL might go up, but so do things that are truly worth nothing, like tulips and beanie babies and Bitcoin. And since those things start out at such small values, their values go up exponentially more, which drags more attention to them, and keeps the values going up higher and higher.

The Fed is the cause of these bubbles. They set the interest rate at an artificially low value, and it pushes people to invest in garbage with the too much cash. Once they see that garbage assets that drag productivity is what we are investing our very valuable time with, farming tulips instead of wheat, creating ASICs instead of building cars, buying houses simply to sell it six months later, they need to step up and pop the bubble.

When they switch from scenario #2 to scenario #1, those assets that are worth nothing quickly go back to nothing. Those assets that were worth $15 PE but were driven to $30 PE go back to $15, and might even drop down to $10 briefly. As an asset holder, and knowing this is going to occur, ahead of time you rush to the exit. What do you buy? Whatever you can that didn't already bubble. What is that? Consumption goods. Oil futures, corn futures, used cars. That's the inflation trigger.

By raising rates they flip the ratio, and this is all an inevitable cycle. The more it went up, the harder it comes down. Why don't they just keep money created equal to productivity so that we don't have these cycles? I don't know, ask them.

There is no back of the envelope calculation.

Finance has lots of feedback effects. Lots of hedge funds invested in crypto. Hedge funds use leverage, which means they invest with borrowed money. When their investments go up in value, those who lend them money (their brokers) are happy to increase the loans. But when the investments go down, they make margin calls. In times like this the hedge funds don't have access to cash, so they need to sell their assets. And they sell in a falling market. Their forced sales drive further price declines, which will in turn force others to start liquidating. It's a vicious cycle.

Will it stop? That's a trillion dollar question. My guess is no.