The Unraveling of Crypto: A Series of Unfortunate Events
The year 2022 saw the cryptocurrency industry thrown into turmoil, notably marked by the infamous bank runs. If you thought the crypto market was safe as houses, this little rollercoaster proved even the sturdiest of castles could crumble with just a few misplaced bricks. This chaotic series of events was primarily triggered by a concoction of high-profile collapses including Terra, Three Arrows Capital, and FTX, each stirring the pot in a way only a blooper reel of bad investments could.
The Power of the Whales: Big Players Make Big Waves
One of the significant factors contributing to the liquidity crisis was the withdrawal behavior of whale investors—those with wallets that could feed a small nation. The Federal Reserve Bank of Chicago (FRBC) highlighted that large account holders, including key institutional players, hit the panic button first. As these mega investors pulled out substantial contributions, the centralised exchanges were left gasping for liquidity like a fish out of water.
Echoes of Terra: The Collapse that Started It All
Picture this. The Terra ecosystem takes a nosedive, and everyone holding its hand goes tumbling down with it. In the staggering 11 days following Terra’s collapse, Celsius and Voyager Digital experienced customer outflows of 20% and 14%, respectively. Just like flicking the proverbial domino, these withdrawals fueled a liquidity crisis that rang alarm bells across the crypto realm.
Three Arrows Capital: The Gift That Kept on Giving (Crises)
Just when we thought things couldn’t get worse, in July 2022, we met another guest at the crisis party: Three Arrows Capital (3AC). Their downfall acted like a contagion, spreading panic and fear. More customers fled from Celsius and Voyager Digital, resulting in further significant outflows — 10% and 39% respectively. Who knew that following a hedge fund’s irresponsible bets could lead to such widespread havoc?
FTX: The Final Straw
Then came November, the month that made many a crypto investor wish for a time machine. The much-discussed failure of FTX triggered a mass withdrawal of customer funds—over 37% vanished before the allegations of financial instability were even fully confirmed. But that’s not all; other platforms like Genesis and BlockFi weren’t immune, witnessing withdrawals of their own amid the chaos. History has a way of repeating itself, and FTX’s fall was like watching a horror movie where the audience shouts “Don’t go in there!”
Lessons Learned: Risk, Rewards, and the Perils of High Yields
As the dust settles, the research report by FRBC argues that the underlying issue wasn’t just about crypto whales or the visible disasters. Instead, it shone a spotlight on lending firms that dangled high yields without due diligence. As these firms lacked the security and insurance typically found in traditional banking, customers responded to market downturns with a little thing called panic. Remember folks, in the land of crypto, high yields come with high risks… and even higher drama!
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