Crypto Whales Win at the Expense of Retail Investors

Ashrith Rao -

Retail investors rushed to buy into the large crypto plunge last year and lost their shirts when the Terra ecosystem collapsed and again as FTX fell apart.

But at the same time, big investors were selling in large quantities during the 2022 crypto crash, all at the expense of at-home retailers.

According to Bank for International Settlements (BIS) experts, that pattern is simply the most recent illustration of the sector's need for enhanced investor protection.

Globally, there is minimal official regulation of cryptocurrencies like bitcoin.

But after FTX's collapse last year, which left millions of investors with losses totalling billions of dollars, regulators have started to pay closer attention.

The digital assets sector sharply declined last year, with the overall worldwide market capitalization dropping to about $1 trillion from a peak of about $3 trillion.

The argument that tokens may be trusted as stores of value and mediums of trade was disproved by the cryptocurrency crash and a number of related bankruptcies.

In a research study, the BIS found that many small investors lost money on their crypto purchases, which was made worse by larger or more knowledgeable players dumping their coins just before the sharp price drop in 2022.

With the catastrophic collapse of several once-highly rated ventures, including Terra/Luna and FTX, last year, investors across the board saw their fortitude put to the test, based on an analysis of cryptocurrency exchanges data by the BIS.

Bitcoin's price dropped more than 60% in 2022, from around a little over $47,000 at the beginning of the year to about $16,500 by the end of December.

Whales vs Retail Investors

The mom-and-pop retail investors in digital assets were holding onto their investments during that period. Some retail investors endured severe losses but continued to stay on while witnessing their investments depreciate.

The whales, or big investors, were not among those.

Throughout last year, the demise of Terra/Luna and the quick collapse of FTX pushed crypto tokens to fall significantly. But trading activity during "crypto winter" increased markedly.

The BIS, in its report, noted, "these patterns suggest that users tried to weather the storm by adjusting their portfolios away from owning tokens under stress towards other crypto assets, including asset-backed stablecoins."

Large wallet owners, or "whales," as the BIS's white paper refers to them, decreased their Bitcoin holdings in the days following these shock events.

But small and medium-sized investors increased their exposure.

Before the sharp price decrease, BIS claimed, the pricing patterns showed that "whales" sold their assets to smaller ones.

The result was that big investors benefited at the expense of smaller investors.