The Bank for International Settlements believes that the collapse of the cryptocurrency market could have harmed international financial stability, had the asset class been more linked to the real economy and the traditional financial system.

The majority of retail investors lost nearly 50% of the bitcoin investments they made between August 2015 and December 2022, according to a Bank for International Settlements (BIS) bulletin published last February 20.

The bulletin, titled “Crypto shocks and retail losses”, is based on data from Sensor Towel, on downloads and active use of more than 200 cryptocurrency exchange apps by individuals in 95 countries between August 1, 2015, and December 15, 2022.  

According to the data, the upward trend of Bitcoin attracted new investors to the market, with 75% of them downloading a crypto exchange app after the price rose above $20,000 in December 2020. 

When an app like Binance, Paxful, or Coinbase is downloaded by an individual, BIS analysts assume that the new user immediately invested $100 and then reinvested the same amount every month.

The average gain or loss of these retail investors is calculated based on the price of Bitcoin at the time investors invest their money on exchange platforms. The purchase prices are then aggregated to form a representative average. Based on this model, BIS concludes that most investors lost part of their investments in Bitcoin. 

An average of $431 loss per retail investor 

BIS analysts estimate that each investor's average loss reached $431 as of December 15, 2022, which corresponds to 47.89% of the average of $900 invested based on the BIS model. 

They note that this loss is most likely even higher in several emerging countries such as Brazil, India, Pakistan, Thailand, and Turkey.

The bulletin points out that the average monthly active crypto exchange app users globally have grown from about 100,000 in August 2015 to more than 30 million in November 2021, when Bitcoin prices reached  $69,000.

The BIS data, which distinguishes between small and medium Bitcoin holders (those who own less than one Bitcoin and between one and 1,000 Bitcoins respectively) and large holders who own wallets of more than 1,000 Bitcoins, further shows that investment performance varies depending on the wallets held. BIS found that the largest investors, known as "whales," sold part of their bitcoin assets just before the sharp price declines following the shocks of the Terra stablecoin (Luna) crash in May 2022 and the bankruptcy of cryptocurrency exchange FTX in November of the same year.  

Dealing with risks before they become systemic problems 

Bitcoin holders whose wallets had between 1 to 1,000 bitcoins, meanwhile, tended to increase their Bitcoin holdings during these periods. As a result, wealthier investors made profits at the expense of smaller ones.

Given the highly speculative nature of Bitcoin investments and the unevenness of the gains, the BIS emphasizes the need for better investor protection in the crypto space.

The Basel-based institution believes that the collapse of the cryptocurrency market, from $3 trillion in November 2021 to $1.2 trillion in February 2023, could have had a much larger impact on international financial stability if this asset class was more intertwined with the real economy and the traditional financial system. It, therefore, calls for a coordinated international response to address the risks associated with crypto-assets before they become systemic. In this context, it suggests several strategies such as banning cryptocurrencies, containing them, regulating them, or a combination of options.