The Lasting Impact of the 2022 Crypto Bank Runs on the Industry

Understanding the Crypto Bank Runs

The 2022 crypto bank runs were like a dramatic episode of a reality show—complete with all the twists and turns that left viewers (and investors) on the edge of their seats. Centralized exchanges faced withdrawals that could make even the most composed poker player sweat. A new report by the Federal Reserve Bank of Chicago (FRBC) digs into the juicy details, revealing how the actions of crypto whales and some not-so-whale-like institutions stirred the perfect storm for a liquidity crisis.

The Domino Effect of Collapse

First up on the fallen crypto giant’s list was Terra, which undeniably kicked off a chain reaction. Following Terra’s implosion, platforms like Celsius and Voyager Digital felt the heat as customers skedaddled with their funds—20% and 14% outflows respectively. It was like a bad breakup where one partner’s trust issues lead to an avalanche of doubt. Celsius had thrown nearly a billion into Terra’s failed algorithmic stablecoin, demonstrating once again that not all that glitters is gold.

Three Arrows Capital: The Hedge Fund That Took Down Several Ships

Next on our tour of devastation was the dramatic exit of Three Arrows Capital (3AC). By July 2022, the winds had shifted yet again, and Celsius and Voyager were left patching up their balance sheets as they witnessed outflows of 10% and 39%. It was a classic case of spreading risk—without a life jacket in sight. With billions lent out to 3AC, firms like Genesis Capital and BlockFi were sailing in troubled waters, desperately trying to avoid the iceberg that the hedge fund had become.

FTX: The Titanic of Crypto Exchanges

Fast forward to November 2022, enter FTX—the crypto exchange that was once sailing smoothly until it found itself on the slippery slope of scandal. After the news of financial instability broke, FTX lost over 37% of customer funds like a paper boat caught in a storm. Comparatively, firms connected to FTX—like Genesis and BlockFi—saw their customers withdraw around 21% and 12% respectively. The tidal wave of panic was palpable, drowning many along the way.

The Aftermath: What Can We Learn?

Surprisingly, while the retail customers cried over spilled crypto, it was those hefty institutional account holders—those with investments over $500,000—that really sent the alarms ringing. A staggering 35% of all withdrawals at Celsius came from the elite club of high-rollers with accounts exceeding $1 million. Clearly, big money, big problems.

However, the true villain? The high-yield promise of precarious investments offered by crypto lending firms, luring investors in like moths to a flame. Unlike traditional banks, these platforms didn’t have safety nets. When market tides changed, panic set in faster than a cat on a hot tin roof.