Whales profited from retail investors in crypto crash in 2022, BIS reports

A new report from the Bank for International Settlements (BIS) reveals that most private crypto investors bought the dip in the wake of Terra Luna and FTX’s collapse while larger investors mainly sold. As a result, a majority of crypto app users in “almost all economies” have lost their bitcoin holdings, with whales selling “at the expense of smaller holders”.

BIS, owned by central banks, analyzed patterns in crypto trading by building a new database of retail investor activity on crypto exchange apps. Using SensorTower, BIS collected daily data on downloads and active usage of more than 200 crypto exchange apps in 95 countries via the Apple and Google Play stores, from August 2015 to mid-December 2022. IntoTheBlock provided information on the daily distribution of bitcoin -inventories of account balances, using chain data.

The report details bitcoin’s meteoric rise from $250 to $69,000 between August 2015 and November 2021. However, by the end of 2022, many cryptocurrencies had plunged in value by around 75%.

“In stormy seas, the ‘whales eat the krill,'” says the BIS report

Graphs show that two distinct instances of price declines in 2022 resulted in a significant increase in trading activity. Just as small investors bought crypto at what they thought was a discount, bigger whales dumped their holdings “at the expense of smaller holders,” the report said.

Data shows in the days after TerraUSD collapsed in May 2022 and after FTX fell in November 2022, “larger investors were able to sell their holdings for less before the sharp price decline.”

BIS’s unique database supported a paper by Auer et al (2022) showing that bitcoin adoption has historically risen shortly after price increases due to the glamor of high prices and high rewards. Even when accounting for other reasons why adoption may increase, the data maintains a positive correlation with higher price as the driving factor for adoption.

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“The price of bitcoin remains a much more important predictor of adoption compared to many other indicators, including stock market performance or volatility, changes in the price of gold or levels of global uncertainty,” the BIS wrote in its report.

In fact, data showed that nearly three-quarters of users downloaded a crypto exchange app when bitcoin was worth over $20,000.

“If investors continued to invest [$100] with a monthly frequency, over four-fifths of users would have lost money“, the report indicated.

In almost all economies, the majority of crypto investors lost money. The median investor would have lost $431 by December, out of $900 in total funds invested since downloading the app. This proportion is even higher in emerging economies such as Brazil, India, Pakistan, Thailand and Turkey, the BIS report revealed.

Traditional finance isn’t blinking…yet

The BIS sought not only to examine the trading behavior of small and large investors in the wake of the two largest shock waves in 2022, as well as the average return on investment. The institute also sought to analyze whether these collapses affected the wider financial markets.

As it turns out, crypto’s ripple effects on the wider financial system have been minimal in these “trying times”. Data revealed no strong correlation between crypto adoption and stock market performance in the two separate periods of turmoil in 2022, nor with economic conditions.

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That said, the BIS urged caution and regulation of crypto “to ensure the stability of the financial system.”

“Content can prevent risks in crypto from spilling over into the real economy and the traditional financial system. The appropriate mix of measures will be needed to promote market integrity, investor protection and financial stability,” it warned.

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