Whales profited from retail investors in 2022 crypto crash, report

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A new report by the Bank for International Settlements (BIS) reveals most retail 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 “nearly all economies” have made losses on their bitcoin holdings, with whales selling “at the expense of smaller holders.”

The 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 use on more than 200 crypto exchange apps across 95 countries via the Apple and Google Play store, from August 2015 to mid-December 2022. IntoTheBlock provided information on the daily distribution of bitcoin holdings by account balance, using on-chain data.

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

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

Graphs reveal that two distinct occurrences of price dips in 2022 resulted in a sizeable uptick in trading activity. Only, while small investors were buying crypto at what they thought was a discount, larger whales were shedding 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 crumbled in November 2022, “larger investors were able to sell their assets to smaller ones before the steep price decline.”

BIS’ unique database supported a paper by Auer et al (2022) that showed 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 spike, the data maintains a positive correlation with higher price as the driving factor of adoption.

Crypto exchange app data reveals that during the Terra Luna and FTX meltdowns, whales sold while small investors bought (via BIS).

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

Indeed, data showed almost three quarters of users downloaded a crypto exchange app when bitcoin was worth over $20,000.

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

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

Traditional finance doesn’t blink… yet

BIS didn’t just seek to investigate the trading behavior of small and large investors in the aftermath of the two largest shockwaves of 2022, as well as the average return on investment. The institute also sought to analyse whether these meltdowns impacted the broader financial markets.

As it turns out, crypto’s ripple effect on the wider financial system has been minimal during these ‘trying times.’ Data revealed no strong relationship between crypto adoption and stock market performance during the two distinct periods of turmoil in 2022, nor with financial conditions.

Crypto’s two major moments of turmoil last year hasn’t impacted traditional finance much, revealing the insular nature of the crypto market (via BIS).

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

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

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