Core Question
How can a token worth a lot of money suddenly plummet to 0 or near it in a few seconds?
How Price is Determined
A price for any asset is determined as the last transaction. So if the second to last BTC sale was for $76,000 but another person comes along and buys it for $80,000, the new price is now $80,000 and is displayed across all websites.
Answer to the Question
What something is worth on paper is not always what it is worth in real life. If I have 500 of a collectible and I sell 1 for $100, then I can say that the total value is $50,000.
Now say we apply a factor of 2,000x to mimic a token marketcap. We have 1,000,000 tokens available. If I have half of the 1 million tokens, and I manage to sell one for $1,000, then the marketcap would be $1 billion. So an investor looking at this will think, "Wow, this token has high adoption and good liquidity!" when in fact, that $1 billion is from just one sale. So the investor trades for say 1,000 of these tokens. When they go to sell, they would expect very low slippage since the supposed trade value is only .1% of the marketcap. But that is not what happens.
Instead, because there has only been one transaction, there are effectively 0 buyers. (Even if they were say 100 transactions, the number of buyers would be practically nonexistent). So, once you try to sell your 1,000 tokens, there is nobody to buy, and so the order plummets through the abyss (the order book) until it hits the only available price, $0. Suddenly a token worth $1 billion is worth exactly $0.
This is exactly how new tokens can attract massive amount of users. If they perform this original transaction with say a friend, then it looks legitimate, pulling in investors into their token. But even if multiple people come to buy/sell, there is not enough liquidity since the original marketcap is artificial demand.
That is to say, this is more to be a concern with memecoins. If you stick with BTC, SOL, ETH, USDC, USDT, and other large cryptocurrencies with history, then you are relatively safe.
