BIS Bulletin by Giulio Cornelli, Sebastian Doerr, Jon Frost and Leonardo Gambacorta
In the last few years, millions of investors have entered the crypto market – despite the high price volatility and the lack of productive real-world use cases. The recent crypto market turmoil triggered by the Terra/Luna collapse and the FTX bankruptcy didn’t stop this trend.
In the latest BIS Bulletin, “Crypto shocks and retail losses”, Giulio Cornelli, CFA, FRM, Sebastian Doerr, Jon Frost and Leonardo Gambacorta build on a new database to investigate the trading behaviour by large and small investors around the world during these episodes.
In particular, they assess whether users made or lost money on their investments. They find that in nearly all countries, the majority of investors have lost money on their Bitcoin investments.
Users tried to weather the storm by adjusting their portfolios, evidenced by the sharp increase in crypto trading activity during the shock episodes. However, blockchain data on Bitcoin holdings by investor size reveals that owners of large wallets, the so-called whales, reduced their holdings of Bitcoin. Meanwhile small owners (“krill”) increased their holdings. This pattern suggests that larger investors were able to cash out at the expense of ordinary users.
Did the stress in the crypto system spill over to the wider financial system outside the crypto universe? The authors find that while the crypto collapse has affected individual investors, the overall impact on the broader system was limited. Still, to ensure the stability of the financial system going forward, societies must decide on the appropriate policy response to address risks in crypto before they become systemic.
You can find the full Bulletin here: https://www.bis.org/publ/bisbull69.pdf
