For all of the innovations and futuristic promises of cryptocurrencies and digital assets, the asset class seems to be following the same script, patterns, and behaviors as previous bubbles.
Like previous bubbles, there is some kernel of promise in terms of a wealth-creating and transformative technology. For early adopters and investors, it delivers life-changing returns. These returns also attract other investors who are often gullible and susceptible to scams that proliferate.
Just like the assumption that home prices would never meaningfully decline in the U.S. justified taking on leverage when investing in subprime mortgages during the housing bubble, similar activity proliferated in the crypto-sphere based on the assumption of consistently rising prices.
While 'defi' was heralded as an innovative breakthrough, in some ways, it was just banking with no regulations. Loaning out your bitcoin or Ethereum for interest makes sense if its value keeps rising but can be brutal if the value drops. This can create a domino effect of liquidations and failures as many people were using leverage and also using 'staked' money to buy coins, leading to even more leverage in the system.
In the traditional finance system, there are safeguards against this even though sometimes bad actors can get around them. There are also agencies like the FDIC which can protect depositors from losing their money if the bank goes under.
In the event of bank failures, the FDIC would often take over the banks during the weekend, separate good assets from bad and transfer ownership to a new bank or entity. It's not a perfect process, but it does create trust in the system by ensuring that depositors aren't totally wiped out.
Prior to the FDIC, banks would fail due to rumors that it was running out of money. People would rush to pull out their money which could actually cause the bank to fail if enough people did so. This is happening in crypto, and there is no mechanism or trust that could forestall this process.
Another aspect of crypto similar to previous bubbles is that it takes on some 'ponzi' like aspects. In particular, there is the need for constant inflows to sustain prices especially because there are no fundamentals like earnings or cash flow. It's why the stock market bounces back after crashes, but something like Beanie Babies or 99.9% of NFTs will never get back to their previous levels.