Fed Research: Whales Played Key Role in 2022 'Crypto Bank' Runs

In 2022, large account holders, known as "whales," played a significant role in the crypto bank runs, according to recent research from the Federal Reserve Bank of Chicago.

The study revealed that these whales were among the first to withdraw their funds, exacerbating the bank runs. For instance, Celsius witnessed 35% of its withdrawals coming from whale accounts before the platform froze withdrawals and declared bankruptcy. These whales had holdings exceeding $1 million. The research also found that whales with investments over $500,000 were the quickest to withdraw their funds and withdrew a higher proportion of their holdings.

The largest crypto bank run occurred on the FTX platform, with an estimated outflow of 36.7% in just five days. Customers withdrew a quarter of their investments from FTX within a single day, showcasing the severity of the situation. The research analyzed bankruptcy filings to understand the outflows of customer funds from five platforms, including BlockFi, Celsius, FTX, Genesis, and Voyager Digital. In total, nearly $13 billion was withdrawn from these platforms during the respective bank runs.

The Federal Reserve Bank of Chicago highlighted that many of these platforms lacked adequate protection against run risks, which contributed to the collapse of FTX in November. Researcher Jonathan Rose noted that bank runs in traditional finance can occur even faster than crypto bank runs, citing the recent collapse of Silicon Valley Bank as an example.

Greater Awareness of Risks in Crypto Investments; Market Shows Recovery

The research findings indicate that individuals and investors now possess greater awareness regarding the risks linked to high-risk, high-yield crypto investments compared to the previous bullish market. The increased volatility and upheaval in the crypto market have heightened recognition of the potential downsides associated with investing in crypto-assets.

Following the crypto bank runs, digital asset markets experienced a crash, reaching a low of $820 billion in November 2022. However, there has been a recovery in the crypto markets during 2023, although the sentiment remains bearish. Regulatory pressure on the crypto industry has intensified. Despite the challenges, the markets have gained 44% since their low points in 2022.

At present, the total capitalization of the crypto market stands at approximately $1.18 trillion, experiencing marginal fluctuations. Apart from a brief surge in mid-April, the market has remained relatively stable over the past two months.

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