The 2022 crypto bank run caused by the collapse of multiple ecosystem giants had a lasting impact on the crypto industry. A new research report from the Federal Reserve Bank of Chicago (FRBC) has identified several key factors and catalysts that accelerated last year’s cryptocurrency crisis.
The report noted that withdrawals by crypto whales and large account holders on centralized exchanges, including some key institutional accounts, created a liquidity crisis that eventually led to bank runs. The first crisis came with the Terra crash, which spurred an exodus of customers from many cryptocurrency lenders exposed to the Terra ecosystem. Celsius and Voyager Digital lost 20% and 14% of client funds, respectively, within 11 days of their collapse. Celsius also invested nearly $1 billion in Terra’s failed algorithmic stablecoin.
The collapse of Three Arrows Capital (3AC) in July 2022 triggered a second major crisis, catalyzed by high client outflows. Celsius and Voyager Digital saw another exodus of 10% and 39%, respectively, due to their exposure to bankrupt 3AC.
3AC became a major source of contagion for the crypto industry, as multiple companies lent billions of dollars in crypto assets to hedge funds, leading to a major crisis after their collapse. Genesis Capital lent 3AC a total of approximately $2.4 billion; BlockFi provided $1 billion; Voyager Digital provided $350 million and 15,250 bitcoins, worth approximately $328 million in July 2022; Celsius provided approximately $75 million Dollar.
The third major crisis comes from the FTX crash in November 2022. The cryptocurrency exchange itself saw customer outflows of more than 37 percent as news of its financial instability became public. Genesis and BlockFi clients withdrew approximately 21% and 12% of their investments following the FTX collapse. While most of these failed crypto platforms had large retail client bases, the withdrawal of institutional clients led to a major crisis. Several institutional clients have made financial contributions to Celsius of between $190 million and $2 billion through June 9, 2022.
Owners of large accounts accounts with over $500,000 in total invested withdraw funds fastest, and faster than other account holders. For example, account owners who invest more than $1 million account for 35% of all withdrawals on Celsius. The research report pointed out that although a large number of customer withdrawals hastened the crisis, the real culprits are crypto lending companies that provide high returns through venture capital. Unlike banks, these lending platforms offer no guarantees or insurance against such failures, and as a result, customers panic during market downturns.
