When stocks, houses and crypto fall, where does all that money go?

Seven months ago, there was a celebratory mood in the air for crypto traders as the two best-known cryptocurrencies, bitcoin and ethereum, shot to new highs.

Advocates said "told you so," as financial journalists reported that the value of the global crypto market had soared to a stunning new record of about $3 trillion US.

A trillion — a million millions, or a one followed by 12 zeros — is one of those numbers so big it is hard to grasp in comparison to our daily lives. A trillion dollars would buy more than 1.3 million Canadian homes. If you kept it in cash, it would give you $1 million a day in spending money for 3,000 years.

But as crypto markets collapsed this week, the value of that pile of global cryptocurrencies has fallen from that $3 trillion to less than $1 trillion US. In other words, the value of 2.6 million Canadian houses just vanished. 

The obvious question, especially for those who jumped into the market at the peak, possibly on the advice of movie star Matt Damon that fortune favours the brave, is: "Where did all that money go?"

"That value has just kind of disappeared," said Sal Guatieri, a senior economist with the Bank of Montreal.

"We're seeing it in stock markets and starting to see it in the housing market in Canada as well," he said. "The value of bonds is [also] coming down pretty quickly."

When that kind of money evaporates from the economy, said Guatieri, it has a serious slowing effect as people and businesses spend less.

As we talked, markets of all kinds — not just crypto — were tumbling. The Toronto Stock Exchange's main index was down nearly three per cent, the S&P 500 was off nearly four per cent, and the NASDAQ nearly five per cent.

Bitcoin and its ilk may feel like a special case because many people refer to cryptocurrencies as money. But, of course, it isn't.

As three economists I spoke to Monday were all careful to remind me, what's disappearing is not really money, but value. For the most part, there are just as many stocks, houses and bitcoins out there in the world; they're just worth less today.

"This is actually one of the issues I remember struggling with hardest when I first got interested in markets," said Stephen Brown, senior Canada economist with Capital Economics.

People first getting into markets have likely heard the statement that for every buyer, there is a seller. And they may take that to mean that as markets fall, there are a whole lot of sellers sucking all this money out of the markets, getting rich in the process.

But as Brown and others said, that is simply not the case. It takes relatively few trades to set the new market price.