Many investors in the crypto world are afraid of one thing—watching their coins suddenly plummet to bargain prices. But do you know? There is actually a pattern behind this. Today, let's talk about the core logic of a sharp decline in stock prices, which I divide into "seven knives." The most critical one is—killing valuation.

What is killing valuation? Simply put, it means the market has changed its tune. The market used to be very optimistic about a certain industry, giving it an extremely high valuation. But later, the market cools down and thinks the valuation is inflated, so it re-prices it. This process is called killing valuation.

Here's a concrete example. The new energy sector has been extremely hot in recent years. Early on, the market valued this industry at a PE ratio of 50. What happened next? The market became saturated, competition intensified, and growth potential was compressed. The market then realized, "50 times is too exaggerated," and adjusted to a 12 PE ratio.

Does that sound like a big deal? Just do the math, and you'll be shocked. From 50 times to 12 times, the decline exceeds 75%. Assuming the company's profits stay the same, the stock price would also drop by 75%. A $100 stock could instantly become $25. This is the terrifying part of killing valuation— the company's actual operations are fine, and its performance logic is sound, but because the valuation model changes, the stock price can be halved.

So, what triggers killing valuation? The most common factor is interest rate changes. Rising interest rates may seem unrelated to stocks, but in fact, they directly shake the entire valuation system.

Why is that? It involves an important concept in investment theory—discount rate. Simply put, it’s how much discount you apply to future money compared to present money. When interest rates rise, investors demand higher returns. In other words, why should I wait ten years to get this money? I need a higher interest rate to compensate.

With this calculation, the present value of future cash flows decreases. For example, $100 ten years from now, in a low-interest-rate environment, might be worth over $70 today. But after interest rates rise, that $100 might only be worth around $30 today. The value shrinks sharply, and naturally, valuations are adjusted downward.

Now you understand why, when the Federal Reserve announces a rate hike, growth stocks start to fall. Growth stocks are characterized by not making money now but earning big in the future. When interest rates go up, the present value of those future profits drops significantly. Valuations can be cut from 100 times to 30 times or even more aggressively. How can the stock price not fall?

This is the first killer of killing valuation. Other factors can also trigger valuation slaughter, but interest rate changes are the most direct and powerful. When investing, never forget this point.