BIS Report inspects aftermath of 2022’s crypto crashes, concludes…

• The Bank of International Settlements recently published a report on the aftermath of 2022’s crypto crashes.
• The report found that there was a significant boom in trading activity after the collapse of Terra and FTX.

The Bank of International Settlements (BIS) recently published its 59th bulletin titled “Crypto shocks and retail losses.” The report took a closer look at the aftermath of the crypto crashes of 2022, which affected millions of investors and left several firms bankrupt. 

Trading activity boomed after Terra and FTX’s collapse

BIS compiled datasets pertaining to retail holdings of crypto assets. Moreover, it crafted a database of retail use of crypto exchange apps at daily frequency for 95 countries from August 2015 to mid-December 2022. Additionally, on-chain data on the daily distribution of Bitcoin [BTC] holdings was also used to form this report. 

The data gathered revealed that the collapse of Terra in May last year led to a significant increase in trading activity. However, large and sophisticated investors were selling to smaller retail investors. A similar pattern was noticed after the fall of FTX in November 2022, where larger investors cashed out at the expense of smaller holders. A significant boom in trading activity was seen on crypto exchanges like Coinbase and Binance on both occasions. 

The bull market of 2021 saw several retail investors venture into the crypto market, lured by the rising prices. BIS’s report found that in 2022, most investors from all economies lost money on their Bitcoin investment due to the crypto market’s downturn. However, Bitcoin investors from emerging economies like Brazil, India, Turkey and Thailand were worst hit by the crypto crashes. 

As far as the broader financial industry is concerned, BIS found that the spillover of risk from the crypto market to the traditional finance markets was limited. “The evidence suggests that crypto shocks have a limited impact on equity prices or broader financial conditions.”

The report concluded that, at best, there was a weak correlation between crypto losses and broader stress.