Whales Catalyzed 2022 ‘Crypto Bank’ Runs According to Fed Research

A new study issued in May by the Federal Reserve Bank of Chicago highlighted the extent to which huge account holders controlled the crypto bank runs in 2022.It stated that last year’s run on prominent crypto platforms was “spearheaded by customers with large holdings, some of which were sophisticated institutional customers.”

Celsius, for example, received 35% of all withdrawals in June before freezing transactions and declaring bankruptcy. These were made by whale accounts worth more than a million dollars. Furthermore, whales with investments worth more than $500,000 were the first to cash out. According to the findings, they also withdrew a greater amount of their funding.

FTX saw the greatest crypto bank run, with an estimated outflow of 36.7% in just five days.

“In one of the most severe episodes, customers withdrew a quarter of their investments from the FTX platform in just one day.”

The study used bankruptcy filings to characterise consumer fund withdrawals from five platforms. BlockFi, Celsius, FTX, Genesis, and Voyager Digital were among them.

Furthermore, during their separate bank runs, consumers withdrew nearly $13 billion from these platforms.

In the run-up to the FTX collapse in November, the Chicago Fed discovered that majority of these platforms lacked effective run-risk protection. Bank runs, such as the recent failure of Silicon Valley Bank, can happen even faster than crypto bank runs, according to researcher Jonathan Rose, a historian of the Federal Reserve System.

According to the findings, consumers are now more aware of high-risk, high-yield crypto investments than they were during the previous bull market. “This turmoil has made consumers and investors more aware of the risks associated with crypto-asset investment opportunities than they may have been in 2021 amid the excitement of an asset class experiencing rapid price appreciation.”

Following the crypto bank collapses, digital asset markets fell to a bear cycle low of $820 billion in November 2022.   The crypto markets have recovered in 2023, but the sentiment remains pessimistic. Regulatory pressure is now increasing. Markets, on the other hand, have risen 44% since their low troughs last year.

At the time of writing, total capitalisation had fallen slightly to $1.18 trillion. With the exception of a tiny spike in mid-April, it has been pretty flat for the past two months.