The Bank for International Settlements (BIS) has published its Bulletin No 69, titled “Crypto shocks and retail losses,” which investigates the behavior of crypto investors and whether the sector has impacted broader financial markets.

BIS was established in 1930 and is based in Basel, Switzerland. Its aims are “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

The report analyses trading behavior in response to the two recent episodes of market turmoil – the Terra/Luna and FTX collapses – building on a new database on retail use of crypto exchange apps from August 2015 to mid-December 2022.

The data reveals that the adoption of crypto apps has risen in lockstep with Bitcoin prices, with most global investors losing money on their investments. What made things even worse was that more prominent investors were able to sell their assets to smaller ones before the steep price decline.

The BIS notes the largely self-referential nature of DeFi and crypto and suggests the need for better investor protection in the crypto space. The report recommends a coordinated global response to address risks in the sector, including options such as banning specific crypto activities, containing crypto, regulating the sector, or a combination of these.

BIS uses data to show that 30 million global users were active in crypto during the rapid price increases in late 2017 and early 2021, which saw around 100 million and 500 million new users join the crypto space.

BIS also found that the two episodes of market turmoil led to a reduction in Bitcoin holdings by the larger wallets, the “whales,” at the expense of smaller investors.

In nearly all economies in the BIS sample, over the period studied by the BIS researchers, a majority of investors likely lost money on their bitcoin investment. Furthermore, the report reveals that the collapse of the crypto sector has — thankfully — not significantly impacted broader financial conditions.

Nonetheless, BIS points out that had crypto been 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 more significant. The report suggests that societies must decide on the appropriate policy response to address risks in crypto before they become systemic.