Understanding the Crypto Bank Runs of 2022
The year 2022 will undoubtedly be remembered as a tumultuous time for the cryptocurrency industry. Bank runs, stemming from failures within key ecosystem entities, reshaped the landscape we once knew. The fallout from these events was so severe that even the experts are still shaking their heads in disbelief. A recent report from the Federal Reserve Bank of Chicago sheds light on what flipped the switch on this digital disaster.
The Role of Crypto Whales and Institutional Withdrawals
Imagine a party filled with enthusiastic guests, and suddenly, the coolest kids (read: crypto whales and institutional investors) decide to skedaddle for the exit. That’s precisely what triggered a liquidity crisis in the crypto markets. As large account holders withdrew their funds from centralized exchanges, panic set in like an unexpected karaoke rendition of “Never Gonna Give You Up.” Notably, some institutional accounts made their rush for the doors, leaving others in a lurch.
Round One: The Terra Incident
The chaos officially kicked off with the collapse of Terra, causing a wave of outflows that sent platforms like Celsius and Voyager Digital scrambling. With over 20% of customer funds disappearing in mere days, these firms faced an overwhelming tide. With Celsius having it’s nearly $1 billion invested in the now-infamous Terra’s stablecoin, their good intentions turned out to be very bad decisions.
Round Two: The Three Arrows Capital Debacle
If you thought the Terra fallout was bad, the July meltdown was enough to make most crypto enthusiasts reconsider their life choices. The collapse of Three Arrows Capital (3AC) triggered significant withdrawals from Celsius and Voyager again. From an outsider’s perspective, it felt like watching a game of Jenga—just when you thought things couldn’t get worse, someone pulled the wrong block. The contagion spread as massive loans went unpaid, which no one saw coming—except for maybe anyone with an internet connection.
The Final Blow: FTX’s Spectacular Crash
Like clockwork, November brought us the spectacular crash of FTX. The fall from grace was as swift as slipping on a banana peel for customers who watched over 37% of their investments vanish as the dirty laundry came to light. Everyone rushed to withdraw their funds, including Genesis and BlockFi customers, creating a frantic atmosphere that would make a reality TV show look like a tea party.
Lessons Learned: The Real Villains in the Story
So, what really caused this whole mess? While massive withdrawals played a significant role in escalating the crisis, the underlying issues stemmed from crypto lending platforms offering outrageously high yields without any semblance of security or insurance. This scenario led to a panic that felt a bit like realizing you’re in a horror movie just as someone is reaching for the door in the dark.
In summary, the lessons learned from these painful episodes should afflict us with long-lasting insights. Just because the potential for high returns is on the table doesn’t mean savvy investors should be tempted to sit at that poker table without an escape plan.
