The recent crypto crisis has left a resounding impact on the crypto space in 2022. A research report by the Federal Reserve Bank of Chicago (FRBC) sheds light on the events that led to this crisis, highlighting the potential danger of relying on high-yield investments without proper safeguards in place.
The collapse of TerraUSD was the first significant event that triggered the crisis in the cryptocurrency sphere. This incident caused major crypto lenders like Celsius and Voyager Digital to experience a massive outflow of customer funds amounting to 20% and 14%, respectively, in just eleven days. Celsius had also invested nearly a billion dollars into Terra’s doomed algorithmic stablecoin, further fueling the panic.
Next up, the downfall of Three Arrow Capital (3AC) led to another wave of customer fund outflows, impacting those who had dealings with the now-bankrupt company. Both Celsius and Voyager Digital suffered again, witnessing outflows of 10% and a significant 39% respectively this time around. 3AC’s collapse rippled through the crypto market, primarily because multiple firms had lent them billions in crypto assets.
Genesis, BlockFi, Voyager Digital, and Celsius suffered substantial losses, having provided loans to 3AC worth $2.4 billion, $1 billion, $328 million (inclusive of 15,250 BTC), and $75 million, respectively.
The third key event was the collapse of FTX, which witnessed a 37% outflow of customer funds as news about its financial instability spread. Genesis and BlockFi clients withdrew about 21% and 12% of their investments as the fallout from FTX’s failing financial situation became evident.
The FRBC research indicates that institutional clients, particularly those with large-sized accounts, were the primary source of withdrawals during the crisis. For instance, large account holders with more than $1 million in investments made up 35% of all withdrawals at Celsius.
While these heavy client withdrawals exacerbated the crisis, the main issue lies with the crypto lending firms that offered high yields through risky investments. Unlike traditional banks, these platforms did not provide the security or insurance to protect their investors against such failures. When the market took a downturn, customers were left to panic in the face of these pitfalls.
In a world where high profits often take precedence over security, the crypto crisis of 2022 should serve as a wake-up call. Market participants need to be willing to prioritize safeguards and mitigate potential risks associated with these new and exciting financial products. If proper precautions are not taken, the consequences, as clearly shown by this crisis, can be dire for all parties involved.
Source: Cointelegraph
