‘Whales’ profited at the expense of retail investors in 2022 crypto crash, BIS study finds

NEW YORK - When the Terra ecosystem collapsed in 2022 and again

as FTX fell apart,

retail investors rushed to buy the big crypto dip. Meanwhile, “whales” were selling en masse – all at the expense of those smaller mom-and-pop traders.

This is according to a study by the influential Bank for International Settlements (BIS).

After analysing crypto exchange data, it concluded that many at-home investors lost money on their investments – likely exacerbated by larger, or more sophisticated, players selling their coins right before the steep price declines seen in 2022.

Owners of large wallets – which the report calls “whales” – reduced their holdings of Bitcoin in the days after the “shock episodes”.

Medium-sized investors and smaller ones – referred to as “krill” – increased their exposures.

“The price patterns suggest that larger investors were able to sell their assets to smaller ones before the steep price decline,” said the BIS researchers. “Large holders thus profited at the expense of smaller investors.”

“In stormy seas, ‘the whales eat the krill,’” wrote economists Giulio Cornelli, Sebastian Doerr, Jon Frost and Leonardo Gambacorta in a report dated Feb 20. “Retail investors have chased prices, and most have lost money.”

The trend is just the latest evidence that the industry needs greater investor protection, said the report.

Last year tested the resolve of all types of investors, with the calamitous crash of previously well-regarded projects, including Terra/Luna and FTX.

Bitcoin fell more than 64 per cent in 2022,

starting the year at around US$47,300 and closing it at near US$16,500, according to data compiled by Bloomberg.

Digital-asset investors have their own terms for those who hold – or “hodl” – through even the roughest of times. The term “hodl” means “hold on for dear life”. Investors who suffer through steep losses and hold on even as they watch their investments continually lose value are sometimes referred to as “bag holders”.

To investigate crypto-trading patterns, BIS researchers built a database of retail investor use of exchange apps across 95 countries, with data spanning between August 2015 and December 2022.

The team found that as prices rose in that stretch – with Bitcoin reaching a near US$69,000 high in November 2021 – more and more users entered the system. The monthly average number of daily active users ballooned to more than 30 million worldwide from 100,000, they said.

The study makes some big assumptions. For example, researchers found that three-quarters of users who downloaded exchange apps were using them when Bitcoin was above US$20,000. They assumed that each new user bought US$100 of Bitcoin in the first month of their app download and in each subsequent month.

But the fact that adoption rises as prices are increasing suggests that many users were wading in simply because they were attracted by high prices and oftentimes expected prices to continue to go up, the BIS said.

Yet over the course of 2022, amid

the downfall of Terra/Luna,

as well as the swift disintegration of FTX, crypto tokens suffered big losses. Trading activity, meanwhile, picked up “markedly”.

“These patterns suggest that users tried to weather the storm by adjusting their portfolios away from owning tokens under stress towards other crypto assets, including asset-backed stablecoins,” the BIS wrote. BLOOMBERG