Whales spearheaded 2022 crypto platform crashes, study shows

According to a Federal Reserve Bank of Chicago research report, large investors were the driving force behind the 2022 runs on crypto businesses such as Celsius and others. 

A recent study by the Federal Reserve Bank of Chicago suggests that the dramatic runs on crypto platforms experienced in 2022 were primarily driven by prominent investors, including institutional clients. 

This finding sheds light on the dynamics of the crypto market and the behavior of sophisticated customers during times of crisis. The study highlights explicitly the case of Celsius Network, a major lending platform that faced significant withdrawal pressure before ultimately filing for bankruptcy.

According to the Chicago Fed research report, a staggering 35% of all withdrawals from Celsius Network in June 2022, just before its collapse, were made by account holders with balances exceeding $1 million. 

These high-net-worth individuals demonstrated a sense of urgency by withdrawing their funds faster than other account holders and withdrew a more significant proportion of their total investments.

Inadequate planning and complacency 

The study further criticizes crypto platforms, including Celsius Network, BlockFi, Genesis Global Capital LLC, Voyager Digital, and the disgraced Sam Bankman-Fried’s FTX,  for their inadequate planning and failure to anticipate the potential rush of withdrawals.

The agency analyzed several bankruptcy filings to understand the outflows of customer funds from these platforms and concluded that their preparation for such scenarios was insufficient. 

The researchers noted that the collapse of FTX and Do Kwon’s Terra ecosystem, in particular, revealed significant flaws in risk management and withdrawal processes.

With the collapse of these platforms, hundreds of thousands of retail investors found themselves in a state of uncertainty and loss. The researchers, Radhika Patel, a research assistant at the Chicago Fed, and Jonathan Rose, a historian of the Federal Reserve System, argue that these episodes constituted a classic financial crisis in a novel digital setting. 

This new landscape has raised urgent policy concerns and highlighted the need for regulatory oversight to protect investors.

In an interview, Jonathan Rose emphasized the unique characteristics of crypto bank runs compared to traditional bank runs. He pointed out that actual bank runs, such as the recent collapse of Silicon Valley Bank (SVB) and others, can happen even faster than their crypto counterparts. 

This disparity is primarily due to the depositor profiles and the technological processes involved in withdrawals. Rose referred to the recent traditional bank runs as the largest and fastest the world has ever witnessed.

Crypto markets on the path to recovery

After the tumultuous events of 2022, the crypto markets have shown signs of recovery in 2023. However, the sentiment remains bearish as regulatory pressure intensifies. Although there was a brief surge in April, with the bitcoin (BTC) price hitting a high of $31,000,  the overall market capitalization has remained relatively flat for the past two months, currently standing at $1.169 trillion, according to data from Coingecko. 

Despite this, the markets have regained 44% of their value since reaching a bear cycle low of $820 billion in November 2022.

As the crypto markets continue their recovery, regulatory scrutiny remains a significant challenge that investors and platforms must navigate to ensure the stability and growth of the industry.