The 2021 Peak: A Case Study in Speculative Excess

The peak of the 2020 to 2021 speculative cycle will be studied in future editions of Kindleberger the way the South Sea Bubble and the dot-com peak are studied in current ones: as a unusually well-documented case of euphoria, where the evidence of excess is preserved in SPAC prospectuses, venture term sheets, crypto white papers, and the social media commentary of the participants in real time.

What made 2021 unusual, even by the standards of speculative manias, was the simultaneity of the excess across asset classes. Venture capital, public growth equity, SPACs, residential real estate, commercial real estate, cryptocurrency, NFTs, meme stocks — the mania was not concentrated in a single sector with a single narrative. It was a broad-based repricing of risk assets driven by the underlying monetary conditions rather than by any sector-specific displacement.

The monetary substrate

The simultaneity is explained by the monetary cause. In a sector-specific bubble — the railroad mania of the 1840s, the dot-com bubble of the late 1990s — the excess is concentrated in the sector that provides the displacement narrative. In a monetary bubble — one driven primarily by the availability and cost of capital rather than by a specific opportunity — the excess appears wherever capital can flow, constrained only by the legal and institutional channels available for deployment.

In 2020 and 2021, those channels included: venture capital (institutional LP capital flowing into funds at unprecedented pace), SPACs (retail and institutional capital seeking growth exposure through a more accessible vehicle), cryptocurrency (a new asset class with no earnings, no cash flows, and therefore no valuation anchor beyond narrative and momentum), NFTs (a further extension of the same monetary excess into digital scarcity), and meme stocks (retail capital, partially enabled by stimulus payments and zero commissions, seeking momentum in short-squeeze candidates).

The 2021 mania was not concentrated in a single sector with a single narrative. It was a broad-based repricing driven by monetary conditions — the tell of a monetary bubble rather than a sector-specific one.

The this-time-is-different arguments

Each asset class in 2021 had its own version of the this-time-is-different argument. Venture: software has zero marginal cost and infinite scalability, therefore revenue multiples of 50x are justified by the terminal cash flows of the best companies, and the discipline of investing only in the best companies means the multiples are appropriate. Crypto: digital scarcity is a genuine innovation, the blockchain is a fundamental infrastructure change, and the addressable market for a trustless global currency system is the entire global financial system. NFTs: digital ownership of verified unique assets solves a genuine problem for digital creators, and the market for digital art and collectibles is as large as the physical art market.

In each case, the underlying displacement was real — software scalability is real, digital scarcity is real, creator monetization is a real need. The error was in the extrapolation: from real displacement to mania-level valuations that required not just that the displacement was real but that it would produce outcomes of a specific enormous magnitude within a specific timeframe. The extrapolation was the bubble; the displacement was not.

What the correction revealed

The correction of 2022 and 2023 separated the displacement from the extrapolation with reasonable efficiency, at least in public markets. Software companies with genuine business models, recurring revenue, and positive unit economics repriced to 5x to 10x revenue — compressed from 30x to 50x peaks but not to zero. Crypto assets without fundamental value propositions compressed to near zero. SPACs that had been taken public on the promise of eventual profitability were marked to reflect the probability of that profitability at normalized discount rates — which for many was close to nothing.

The private market correction has been slower — forced by fund marks, secondary market transactions, and down rounds rather than by continuous public price discovery — and is not yet complete as of this writing. The zombie private company problem parallels the zombie public company problem: companies that raised at 2021 valuations and extended their runway through 2024 and 2025 are facing a reckoning when that runway ends.

The 2021 peak was not irrational. It was the logical conclusion of a monetary environment that made it rational — for any individual participant — to deploy capital into long-duration risk assets at valuations that assumed the environment would persist. The environment did not persist. The lesson, again, is that valuation is always a function of both the asset and the rate environment. The two cannot be separated.

This post represents the analytical views of the author and is intended for informational and educational purposes only. Nothing herein constitutes investment advice or a recommendation to buy or sell any security.