Crypto shocks and retail losses
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Key take aways
- ♦A new data set on retail holdings of cryptoassets reveals that in the wake of the Terra/Luna collapse and the FTX bankruptcy, crypto trading activity increased markedly, with large and sophisticated investors selling and smaller retail investors buying.
- ♦Data on major crypto trading platforms over August 2015–December 2022 show that, as a result, a majority of crypto app users in nearly all economies made losses on their bitcoin holdings.
- ♦Nevertheless, despite crypto's large user base and the substantial losses to many investors, the market turmoil in 2022 had little discernible impact on broader financial conditions outside the crypto universe, underlining the largely self-referential nature of crypto as an asset class.
Millions of investors entered the crypto market over the past few years. They bought and sold coins on exchanges and lending platforms, including in decentralised finance (DeFi) markets. The inflow of investors – especially retail investors – continued despite crypto’s high price volatility and the lack of productive real-world use cases. After prices peaked in November 2021, crypto’s rise reversed course in 2022, when the prices of many cryptoassets collapsed. As valuations tumbled, over $1.8 trillion of crypto value dissolved. Over $450 billion vanished during the market turmoil following the Terra/Luna collapse in May 2022 alone; another $200 billion was lost in the wake of the FTX bankruptcy in November 2022. This Bulletin addresses three main issues surrounding the crypto market, building on a new database (Auer et al (2022)). First, it investigates trading behaviour by large and small investors around the world during the Terra/Luna and FTX meltdowns. Second, it assesses whether users made or lost money on their investments on average. And third, it analyses whether the market turmoil in crypto and DeFi in 2022 had any discernible effects on financial conditions in the broader financial markets outside the crypto universe.
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