Although the repercussions of the carnage in crypto markets won’t be as broad or dire as those of the 2008 financial crisis, the parallels between the two episodes offer insights into what went wrong, and what’s likely to come.
All financial manias have some features in common. Strong beliefs feed into self-reinforcing feedback loops. On the way up, positive performance and speculation compound one another, fueled by borrowed money.
On the way down, everything runs in reverse. Failures erode trust and participants flee until the whole system breaks down.
In the 2000s, the central belief was that home prices couldn’t decline on a national basis.
In crypto, the belief was that this new market would keep growing until it displaced traditional finance.
Bill Dudley Bloomberg 21 november 2022