A Treatise on Imaginary Numbers
Someone sold one share of a company for $600.
And somewhere, in a glass tower that was definitely not compensating for anything, a number updated. Then another number updated because it tracked the first number. Then seventeen other numbers updated because they tracked the second number through a structure so complicated that the people who built it are no longer entirely sure it exists. And a retiree in Ohio felt briefly richer. He didn’t check. You don’t check when you feel richer. You just feel it.
That is the essence of modern finance.
A mutual agreement not to look down.
Market cap is the last price multiplied by all outstanding shares. That’s it. That’s the whole trick. One transaction – possibly between two people who know each other, possibly on a Friday afternoon when literally nothing else is happening – sets the “value” of everything. Every share that didn’t trade. Every derivative on the shares that didn’t trade. Every ETF built from the derivatives. Every pension fund holding the ETF. The whole magnificent teetering tower of abstractions, repriced by one tick.
The universe is not only stranger than we imagine, it is stranger than we can imagine. Yep, I’m thinking about you, options markets.
So when you hear that crypto “lost $800 billion in value” over a weekend, the honest question is: where did it go?
Nowhere.
It went nowhere because it came from nowhere. It existed as a number on a screen, derived from the marginal transaction, extrapolated across all tokens, and never once stress-tested by actually trying to sell them all at that price. You cannot sell everything at the marginal price. The marginal price exists precisely because most people aren’t selling. The moment they do, the price discovers what it always actually was, which is considerably less, and which the market will describe as a “correction” as though the previous number was somehow correct.
It wasn’t. It was a polite collective fiction. And like all polite collective fictions – Santa Claus, the Eastern Bunny, that this time you’ll breeze through the DMV – it functions perfectly well until someone starts asking inconvenient questions.
The fiction itself is fine. Useful, even. The problem is what humanity, in its infinite creativity, chose to build on top of it.
People borrow against it. Companies use inflated stock to buy other companies, which then gets included in someone else’s market cap, which someone else borrows against, in a beautiful recursive loop that accountants refer to as “the balance sheet” and everyone else refers to as “not my problem until it is”. Pension funds model solvency on it. Margin desks extend credit based on it. Entire industries – and I mean entire, enormous, suit-wearing, jargon-generating industries – exist solely to manage, hedge, and insure wealth that has never ever been tested against a real seller in need of liquidity.
And then the number drops.
A margin call, for the uninitiated, is a formal communication from your broker explaining that due to adverse price movements in the underlying securities comprising your portfolio, the current collateralisation ratio has fallen below the minimum threshold required to maintain your leveraged positions, and therefore pursuant to the terms and conditions of your margin agreement – which you signed, and which you definitely read – the firm reserves the right to require immediate deposit of additional funds or eligible securities to restore the required maintenance margin, failing which the firm may, at its sole discretion and without further notice, liquidate some or all of your positions to recover the outstanding balance, and they would appreciate your prompt attention to this matter.
It means: we need cash.
Right now. Not tomorrow. Not “when things stabilise”. Now. And because everyone who borrowed against the same fiction gets the same call at roughly the same time, they all sell at the same time, into the same market, where the buyers have mysteriously evaporated, which drops the price further, which triggers more margin calls, which triggers more selling, which – and you can probably see where this is going.
This is called a “liquidity crisis” in the same way that jumping off a building and discovering gravity is called an “aviation incident”.
When someone actually needs cash – not “mark to market” but actual money for actual things – the gap between the screen number and the real number becomes very real very fast. Real destruction leaves rubble. A building falls, you have bricks. A factory burns, you have ash and insurance adjusters. But paper wealth evaporation leaves nothing. No rubble. No trace. Just a retired teacher in Ohio whose pension is “currently under review” because the number changed, and nobody can adequately explain where the number went because the number was, in a very meaningful sense, nowhere.
The factories are still standing. The land is still there. The oil is still in the ground. The physical universe did not notice.
Only the agreement changed.
The number has since moved on.
Rumour has it it’s doing very well in a different asset class.
The number could not be reached for comment, which was always the problem.