We have finally reached the long-predicted "Crypto Winter" where a number of major crypto companies such as Celsius NetworkCEL 0.0%, Voyager Digital and Zipmex have filed for bankruptcy protection, major crypto funds such as Three Arrows Capital have failed, and the price of all cryptos has fallen dramatically. To folks who remember the 2000 "dot.com" crash, this probably seems all too familiar. One day, crypto is the next big thing promising unlimited riches; the next, crypto seems like a bottomless pit of failures and the life savings of hundreds of thousands suddenly wiped out. May we then take this moment to reflect objectively, without all the hype of the next super-valuable token, on the crypto sector.

In the end, crypto was simply the latest financial mania, one of many such manias in history that probably has as the most famous the so-called Tulip Mania in the Dutch Republic between 1634 and 1637. Manias occur largely because some asset starts going up rapidly in value such that the public's interest is caught and then investments into the asset become widespread as easy and massive wealth seems to be within reach of the average investor. This of course drives the asset value far past its fundamental value (the value reasonably calculated by its functional utility), such as during the tulip bulp mania where tulip bulbs were sold at one point for roughly ten times the average income of a skilled artisan. Eventually, however, an inflection point is reached where the high price can no longer be sustained. The ensuing fall in price causes concern by investors that they need to get out as quickly as possible, and this creates the inevitable stampede for the exits where many are crushed in the process.

In modern finance, the selling stampede is actually much worse, because many investors purchased their interests with margin credit, and as the price goes down, these investors are forced to liquidate increasing amounts of their interests to meet their margin calls, thus triggering even more selling, more price deterioration, and more margin calls, until the so-called margin death spiral comes into effect which finally bottoms the price after wiping out billions in wealth. This happened with crypto, just like it happened with the dot.coms in 2000 and also with mortgage-backed securities and their related derivatives in 2008.