Bank for International Settlements analyzes crypto market turmoil and losses for retail investors

Analysis that “large investors sold out”

The Bank for International Settlements (BIS) released a report on the 20th that analyzed the crypto asset (virtual currency) market turmoil in 2022 and the loss of retail investors. In its conclusion, it states that it is desirable to implement policy measures to curb risks associated with virtual currencies.

BIS reported on three main points:

• During the turmoil caused by the FTX bankruptcy, institutional investors sold and retail investors bought.
• Over the past seven years, the majority of cryptocurrency trading app users have lost money in Bitcoin (BTC).
• The turmoil in the cryptocurrency market had little impact on the broader financial markets.

First, during the collapse of the old Terra ecosystem and the collapse of FTX, trading volumes surged on major platforms such as Binance. The BIS described the move as an indication that users were trying to adjust their portfolios by letting go of their plummeting tokens.

During this time, large investors, known as “whales”, who owned wallets containing assets in excess of 1,000 BTC, reduced their bitcoin holdings in the days following the shock date.

The price pattern also suggests that large investors were able to sell assets to smaller investors before the price plunge. The BIS said, “Large investors profited at the expense of small investors.”

Loss of investment app users

According to BIS, the increase in new users was tied to the rise in the price of Bitcoin. Usually, the number of users increases about two months after the price increase. The rise in price and user numbers was similar for Ethereum (ETH).

The BIS argues that many users in most economies around the world are losing money under these trends. BIS analyzed cases of over 200 cryptocurrency trading apps in over 95 countries. We simulated each new user by assuming that they purchased about ¥13,000 ($100) of bitcoin each month from the month they first downloaded the app.

As a result, the average investor had invested about 120,000 yen ($900) by December 2022 and lost about half that amount, or about 58,000 yen ($431). More than four-fifths of people lost their money if investors downloaded the app and invested monthly.

Emerging market economies such as Brazil, India, Pakistan, Thailand and Turkey were even more likely to lose money.

Calling for a global policy response

The BIS said the turmoil in the cryptocurrency market had limited impact on the broader financial system, although some retail investors were affected. However, if cryptocurrencies and the broader financial system were more closely linked than they are today, the impact of cryptocurrency market shocks on the real economy could have been greater, he said.

The BIS is of the opinion that it is desirable to coordinate policy responses globally as follows.

In December last year, the BIS set a standard for traditional banks to limit their holdings of cryptocurrencies to 2% of their total assets.

connection: Bank for International Settlements (BIS) sets bank virtual currency holding limit to 2%