A recent report by the Bank of International Settlements (BIS) revealed that the crypto industry lost over $650 billion after two major scandals that rocked the market last year.
The report titled “Crypto Shocks and Retail Losses” explained investors’ trading behavior during and after the scandals, their profits and losses, and the effects of the crypto market turmoil in the broader financial system.
Retail Investors Bought the Dip
Last year, the crypto space saw a lot of horrible incidents that forced several firms into bankruptcy, with over $1.8 billion wiped from the market in the aftermath.
One such event is the $40 billion Terra-Luna ecosystem collapse in May. According to the BIS, over $450 billion vanished from the market after the crash.
About six months later, the world’s third-largest crypto exchange FTX collapsed, removing over $200 billion from the market.
The BIS also found that daily user activity grew on crypto trading platforms last year as investors tried to adjust their portfolios. They attempted to move away from the tokens that were under stress.
While whales and larger investors sold off their holdings, medium-sized holders and retail investors increased their bitcoin positions by buying the dip. According to the BIS, the whales “probably cashed out at the expense of smaller holders.”
Limited Effect on the Broader Financial System
Furthermore, the report revealed a weak correlation between crypto losses and the broader financial system. The BIS suggested that crypto scandals have a limited effect on the broader financial sector due to the current level of crypto adoption.
While individual and institutional investors recorded huge losses in their crypto investments, the traditional financial system remained unscathed.
“Our analysis also suggests that the steep decline in the size of the crypto sector has not had repercussions for the wider financial system so far. However, if crypto were more intertwined with the real economy and the traditional financial system, the aggregate impact of a shock in the crypto world could have been much larger,” the bank said.