Cryptocurrency markets saw a dramatic collapse of over $46 billion in the latter half of 2022, with 4.3 million crypto investors affected. This was a result of five major crypto firms - FTX, Celsius, Voyager, BlockFi and Genesis - offering customers instant withdrawals while having much of their assets sequestered in illiquid or risky investments aimed to generate unsustainable yields. Radhika Patel and Jonathan Rose from the Federal Reserve Bank of Chicago conducted a study to delve deeper into this phenomenon, and found that the extent of rapid withdrawal was remarkable.

Per the study, the firms were providing 7.4-17% interest yields, which was implausible in the then existing low interest-rate environment. Out of the five, FTX reported withdrawal of 37% of customer funds, with 80% of that amount withdrawn in two days. The runs in the other four firms were smaller, but majority of these had their balance sheets marred. Some of these firms, such as Celsius and Voyager, had fallen prey to the bankruptcy of TerraUSD and Three Arrows Capital respectively, and BlockFi and Genesis were induced to a crash due to FTX.

By analyzing account withdrawals, the Chicago Fed found that large institutional investors had taken the lead in quickly withdrawing their investments, thus leaving individual retail customers with fewer options. Owners of accounts with a minimum of $500,000 saw prompt withdrawal of an estimated 35% of all deposits at Celsius.

FTX’s huge withdrawal from retail customers ultimately showed that investors of small or mid-sized holdings had borne the brunt of the crypto collapse, pushing the crypto market into a tailspin of losses. With this kind of massive money vanishing from the landscape, the prospective repercussions will remain to be seen for a long while.



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