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The Influence of Large-Scale Investors on Cryptocurrency Platform Instability in 2022: A Study

The Major Players in the Crypto Run

Large-scale customers, including a significant number of institutional investors, were identified as key players in the 2022 crypto platform runs, particularly on the Celsius Network. According to a study conducted by the Federal Reserve Bank (Fed), these investors were responsible for a large portion of the withdrawals that plunged these platforms into bankruptcy.

Specifically, in the case of Celsius Network, the Chicago Fed reported that accounts holding over $1 million accounted for 35% of all withdrawals in June. Following this, Celsius Network was forced to halt withdrawals before ultimately filing for bankruptcy. The research also indicated that investors with more than $500,000 invested were the quickest to remove their funds, taking proportionately more out than other investors.

Source: Federal Reserve Bank of Chicago, Bloomberg

The Domino Effect: Crypto Platforms Collapse

The bankruptcy filings from various lenders, including Celsius, BlockFi, Genesis Global Capital LLC, FTX, and Voyager Digital, provided the data for the Chicago Fed’s research. Each of these platforms succumbed to bankruptcy last year, causing significant losses for hundreds of thousands of retail investors.

The lack of preparation for the onslaught of withdrawals became glaringly apparent, particularly in relation to FTX and the Terra-Luna ecosystem’s collapse. FTX saw a quarter of its total investments withdrawn in a single day, whereas Voyager lost approximately 39% of its total holdings during the run from June 12 to July 2, preceded by a 14% outflow in May.

Crypto Crises: A Wake-Up Call for Policy Makers

These incidents, collectively forming a unique financial crisis, have sparked major policy concerns, as expressed by the study’s authors, Radhika Patel, a research assistant at the Chicago Fed, and Jonathan Rose, a historian of the Federal Reserve System.

The scale and speed of these crises were noteworthy, even when compared to traditional bank runs. For instance, the recent collapse of Silicon Valley Bank occurred even faster than the runs on the aforementioned crypto platforms. Rose attributes this primarily to the nature of the depositors using these platforms and the technology and processes employed for withdrawals.

Lessons Learned: Speed, Scale, and Preparedness

These findings shed light on the striking vulnerabilities of both crypto and traditional banking platforms. They emphasize the importance of preparedness for such withdrawal rushes, particularly when serving large-scale and institutional investors.

The scale and speed of the 2022 crypto platform runs were exceptional. As Rose concluded, “the runs on those banks were extraordinarily large and fast — the largest and fastest we’ve ever seen.” These events underline the urgent need for enhanced risk management strategies and policy adjustments to prevent future occurrences and protect smaller retail investors caught in the crossfire.




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