The Bulletin No. 69, titled "Crypto shocks and retail losses," by the Bank for International Settlements (BIS), examines investor behavior in the cryptocurrency market and whether it has had an impact on other financial markets.
Basel, Switzerland serves as the home location for BIS, which was founded in 1930. "To help central banks in their pursuit of monetary and financial stability, to develop international collaboration in those areas, and to act as a bank for central banks," are some of its stated objectives.
The paper builds on a new database on retail use of cryptocurrency exchange apps from August 2015 to mid-December 2022 to analyze trading behavior in response to the two most recent bouts of market turmoil—the Terra/Luna and FTX collapses.
The data shows that, with the majority of international investors losing money on their investments, the popularity of cryptocurrency apps has increased in lockstep with Bitcoin prices. The fact that more well-known investors were able to sell their assets to smaller ones before the sharp price decrease made the situation much worse.
The BIS raises the issue of the need for improved investor protection in the cryptocurrency field and draws attention to the primarily self-referential nature of DeFi and crypto. The research suggests a coordinated international approach to address dangers in the industry, including measures like outlawing particular forms of cryptocurrency, limiting cryptocurrency, regulating the industry, or a combination of these.
Using statistics, BIS demonstrates that during the sharp price spikes in late 2017 and early 2021, which saw between 100 million and 500 million new users enter the crypto market, there were 30 million active users worldwide.
The BIS also discovered that the two periods of market unrest caused larger wallets, or "whales," to reduce their Bitcoin holdings at the expense of smaller investors.
Over the time period analyzed by the BIS researchers, the majority of investors probably lost money on their bitcoin investments in almost all of the economies in the BIS sample. The survey also shows that, happily, the collapse of the cryptocurrency industry has not had a substantial influence on the state of the global economy.
However, BIS points out that the overall impact of a shock in the cryptocurrency world might have been considerably worse if crypto had been more integrated with the real economy and the conventional financial system. The research makes the argument that before crypto concerns become systemic, society must choose the best course of action in terms of legislation.
Mike Novogratz, founder and CEO of Galaxy Digital, expressed his dissatisfaction with the BIS findings in the following tweet: