Photo: DADO RUVIC/REUTERS

In the past six weeks, $1 trillion in cryptocurrency value has evaporated—yes, trillion. Since there was nothing of economic value driving up crypto prices, only mass delusion, there hasn’t been much to cushion their descent. It’s as if a giant bellows has been blowing hot air into bitcoin and others, and it suddenly stopped working. Fanboys yelling “store of value” and “fiat hedge” can’t seem to explain why bitcoin is falling as inflation rages.

This column noted a few weeks ago the risks of “algorithmic stablecoin” Terra, backed by the Luna token. Terra was designed to stay at $1, and Luna tokens would be issued to buy Terra if it dropped below $1. Well, it did last week, dropping to below 20 cents. So many Luna tokens needed to be issued that Luna’s price dropped more than 99% in 24 hours and it is now worth 3/100ths of a cent, down from $60 seven days ago. Ouch. Things happen fast. Remember the initial public offering last year for Coinbase, the crypto exchange, which traded at close to a $100 billion valuation? It’s now $18 billion. Too many momentum investors late to the crypto party traded real money for fake currency and lost.

The same thing is playing out in stocks, which are at least backed by future earnings. The market selloff has been nasty—down, down, down for seven weeks in a row. And it’s not only the hyped, memed, freshly IPOed and SPACed, like DraftKings and Beyond Meat, it’s real stuff. Facebook is running out of new customers. Netflix, PayPal, Lyft—all are enduring relentless stock sell-offs. It’s certainly less bubblicious out there, but is it over?

I asked an old Wall Street buddy when we’d know the selling is over, and I thought I heard him say, “After we seek redemption.” I suppose he’s right, so I asked, “You mean a spiritual awakening, atonement for the guilt of overpaying for Rivian and Carvana, deliverance for the sin of thinking NFTs were real? For . . .” “No,” he interrupted, “what I said is the selling stops after we see redemptions.” Oh.

We need to see capitulation. That’s when those newbie investors who bought crypto and stocks via Robinhood or piled into Cathie Wood’s ARK Innovation exchange-traded fund, ARKK—and “held on for dear life” with “laser eyes” and “diamond hands,” to use some Reddit lingo—finally dump what they own and swear to the almighty Elon Musk never to buy crypto or stocks again. It’s coming. By the way, Robinhood stock is down 85% from its August peak; ARKK is down 74% from its February 2021 peak.

In Wall Street speak, it’s known as the puke. It’s the capitulation of people insistent on selling at any price. When they dump their mutual funds and ETFs and dogecoin at any price, when we see redemptions run amok, that’s when we’ll be near the bottom.

On March 6, 2009, the sentiment was “Wall Street is imploding—sell no matter the price” as the Dow bottomed at 6470. The Federal Reserve’s zero-interest-rate policy has pumped those hot-air bellows ever since.

Pull up the chart of any high flyer from the past few years—Teladoc, Roku, whatever—and you’ll see a camel’s hump. Stock prices rose on hype and, absent hot air, are falling back to earth. Over? I’m not so sure.

Why the Fed overstayed its welcome at zero is still a mystery, but rising interest rates have ended the party. My guess is that we will see 4% to 5% short-term rates. That might cause a recession, and then disappointing earnings could send stocks into another tailspin.

ARKK, which owns 4% of Coinbase, 4% of Robinhood and 12% of Teladoc, may have some unwinding to do. Funds with dazzling performance on the way up tend to attract gullible investors near their peak and lead to eventual redemptions as they fall.

Perhaps Elon Musk should have waited a few weeks and bought Twitter for, I’m guessing here, $27 a share instead of $54. His $1 billion breakup fee might save him $22 billion.

It’s rarely straight down. There will be relief rallies. Crypto may head back up. So could many of the once high-flying stocks, in what’s affectionately known on Wall Street as a dead cat bounce. But some won’t make it. Peloton is borrowing $750 million to cover losses—survival capital. Others won’t be able to. From the dot-com demise, Pets.com and eToys.com are both very much still dead. I remember in previous cycles that investors cared about how much cash companies had on their balance sheets. That may return soon—and would be a bullish sign.

It’s a weird time. After 40 years, interest rates are headed up, probably for the next two years, meaning bond prices are headed down. Stocks, for now, are headed down. Crypto is headed down, some to zero. There is no haven. Sometimes cash is king, but not forever. The market is forward-looking and will anticipate the end of inflation and the end of interest-rate hikes before they happen. But the market can’t anticipate the psychology of infectious selling. Wait for the puke.

Write to kessler@wsj.com.