Analysts highlighted a number of shocks that led to the crisis in the digital asset market

​Investors lost $46 billion due to the bankruptcy of crypto companies

17.05.2023 - 11:40

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5 min

What’s new? According to a study by the Federal Reserve Bank of Chicago, 4,3 million crypto investors lost $46 billion in just five months in 2022. The losses were caused by the bankruptcy of major market players — the FTX exchange, lending platforms Celsius Network and BlockFi, and brokers Voyager Digital and Genesis. In most cases, these companies offered high yields (from 7,4% to 17%) and had insufficient liquidity.

Material on the bank’s website

What else is known? In the article, the bank’s analysts described the collapse of several crypto platforms that offered customers products related to high-yield investments, trading, and custodial services. These platforms used customer funds to make illiquid and risky investments, which ultimately led to a “classic financial crisis.”

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According to the bank, FTX had 9,7 million customers, Voyager had 3,5 million, and Celsius had 1,8 million, with high-yield products being the main way to attract customers.

The first major shock to the industry was the collapse of Terraform Labs’ (TFL) TerraUSD algorithmic stablecoin, in May 2022. Within 11 days of the incident, Celsius and Voyager experienced client money outflows of 20% and 14%, respectively. Between January and May 2022, $4,4 billion was withdrawn from BlockFi.

The second shock was the collapse of the hedge fund Three Arrows Capital (3AC) in June, as a result of which another 10% and 39% of deposits were withdrawn from Celsius and Voyager. BlockFi faced a $3,3 billion outflow from June to November 2022.

The third shock was the collapse of FTX in November 2022. In just 2 days, 37% of customer funds were withdrawn from the exchange, and 21% and 12%, respectively, from the Genesis and BlockFi platforms.

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The authors of the study believe that the market “effectively punished” companies that took excessive risks and committed abuses in an attempt to pay high profits to customers. In doing so, their collapse resulted in widespread losses for millions of retail investors who are waiting to recover some of their funds in bankruptcy proceedings.

Situation with bankrupt platforms. In March, Celsius resumed withdrawing assets from some Custody program customer accounts. The platform’s lawyers and advisers are estimated to receive $144 million in fees, which will be paid out of the total amount to be distributed to creditors.

FTX recovered about $7,3 billion in liquid digital assets and cash in April. The company may decide to restart as early as Q2. FTX alsor equested a $3,9 billion refund from Genesis as part of a plan to bail out lenders, Voyager will reserve another $445 million for the exchange. In both cases, the funds were borrowed by the exchange and repaid on the eve of its bankruptcy.

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In May, Voyager announced payments of 35,72% of its aggregate claims against the company in cryptocurrency or dollars. The company has $1,334 billion in assets, 75,68% of the aggregate value of the claims.

Also in May, a court in the US allowed BlockFi to refund $297 million to customers with deposits under the Wallet program. The decision did not affect interest-bearing account holders, such funds were transferred to BlockFi’s management, they are considered the company’s property and can be used to reimburse creditors.

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