Crash Nº 11 · 2018–2022
The Crypto Mania
The most speculative asset ever invented meets the oldest pattern in finance
−77% Bitcoin, Nov 2021 peak to Nov 2022 trough
The Setup
After the 2018 crypto winter, the story got an upgrade. Bitcoin was no longer digital cash for the internet; it was “digital gold,” an inflation hedge for an age of money printing — and when COVID hit in March 2020, the age of money printing duly arrived. Zero rates, stimulus checks, and a population stuck at home with trading apps: the displacement was macroeconomic, and it was real.
What the cycle added was machinery. Stablecoins let dollars move at crypto speed; offshore exchanges offered 20–100× leverage through perpetual futures; DeFi protocols paid double-digit “yield” on deposits that were, functionally, loans to speculators.
The 8th edition of the book gives this mania its own chapter, on the grounds that an asset with no cash flows, no issuer, and no anchor may be the purest speculative vehicle ever created — nothing to value it but the next buyer.
Displacement, 2019–early 2020
The “digital gold” narrative takes hold as central banks ease. Even the March 2020 COVID crash — bitcoin briefly halves in two days — reads, in hindsight, as the last moment the asset was cheap.
Boom, 2020
Stimulus meets scarcity marketing. Public companies put bitcoin on their balance sheets, PayPal opens the on-ramp to millions, and the halving narrative does the rest. Price quadruples in nine months.
Euphoria, 2021
The greater-fool stage, industrialized: NFTs of rocks sell for millions, memecoins mint overnight fortunes, exchanges buy Super Bowl ads, and total crypto market value touches $3 trillion. In November, bitcoin prints $69,000.
Distress, winter 2021–22
The Fed pivots hawkish and the marginal dollar stops arriving. Prices grind down for months while the leverage stays in place — the system is now a stack of collateralized positions waiting for a trigger.
Panic, May–November 2022
Terra’s $60 billion algorithmic stablecoin unwinds in a week, taking Celsius, Voyager, and Three Arrows with it. Six months later FTX — the exchange that ran rescue operations all summer — turns out to have lent its customers’ deposits to its own trading firm. Bitcoin bottoms near $15,500; the panic ends only when the leverage is gone.
The Reckoning
Every phase of the classic pattern ran at software speed, including the frauds revealed at low tide. What was missing was the other half of the book: no central bank stood behind crypto, so there was no lender of last resort — and also no case for one. The system burned out, the contagion barely touched the banks, and the cycle promptly began again. A hardy perennial indeed.
What it cost
A BIS study of retail holdings found that almost three-quarters of crypto app users downloaded their app when bitcoin was above $20,000, and that in nearly all the economies it covered a majority of them probably lost money on it. Larger and more sophisticated investors tended to sell just before the steep falls; the smaller ones were still buying.
- ~600,000 Celsius Earn accounts on the day it filed, holding cryptocurrency worth about $4.2bn on 10 July 2022, which the bankruptcy court then ruled was property of the estate Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, In re Celsius Network LLC, No. 22-10964 (MG), US Bankruptcy Court, Southern District of New York, 4 January 2023
- $431 the median crypto app investor’s loss by December 2022 — almost half of the $900 the simulation has them investing since downloading the app; on monthly investing, over four fifths of users would have lost money Cornelli, Doerr, Frost and Gambacorta, Crypto shocks and retail losses, BIS Bulletin No 69, 20 February 2023
- over $450bn crypto and DeFi asset value destroyed between May and June 2022, in the turmoil that followed the Terra/Luna collapse; another $200bn went after FTX filed in November Cornelli, Doerr, Frost and Gambacorta, Crypto shocks and retail losses, BIS Bulletin No 69, 20 February 2023
When Celsius asked the court to declare the Earn deposits its own property, the depositors answered in writing. More than twenty creditors filed responses, some through counsel and some representing themselves; 452 joined one pair of objections and 340 another, and 397 signed a statement that the official creditors’ committee had abdicated its responsibility to represent them. Their common argument was that the terms of use said loan and lending throughout, so a layperson would read them as leaving ownership with the depositor. On 4 January 2023 Chief Judge Martin Glenn held that the terms unambiguously transferred title to Celsius.
What followed
No government fell. The reckoning ran through the courts and the regulators. On 28 March 2024 Samuel Bankman-Fried was sentenced to 25 years in prison and over $11 billion in forfeiture, after conviction on seven counts of fraud and conspiracy; FTX and Alameda were ordered that August to pay $12.7 billion to customers and victims. In July 2023 the Financial Stability Board published a global regulatory framework for crypto-asset activities, strengthened in light of the previous year on safeguarding client assets, conflicts of interest and cross-border cooperation. Celsius’s Earn depositors were left with unsecured claims.
US Department of Justice, US Attorney for the Southern District of New York, Samuel Bankman-Fried Sentenced To 25 Years In Prison, 28 March 2024; CFTC Release Number 8938-24, CFTC Obtains $12.7 Billion Judgment Against FTX and Alameda, 8 August 2024; Financial Stability Board, FSB finalises global regulatory framework for crypto-asset activities, 17 July 2023; In re Celsius Network LLC, Memorandum Opinion of 4 January 2023