Key Points
- Exchange balances fell by nearly 200,000 BTC compared with pre-FTX levels as customers lost trust in centralized exchanges.
- This outflow surpassed the reaction to Celsius in June, when 128,000 BTC left exchanges within a month of that collapse.
- Terra collapsed in May, but because it was a DeFi protocol rather than a centralized company, it did not immediately erode trust in centralized exchanges.
- The full extent of contagion from the FTX collapse will only become clear with time.
Trust in cryptocurrency exchanges is at some of the lowest levels recorded. The shock from the FTX collapse helps explain why: just a month before the crisis, FTX was widely regarded as one of the safest exchanges.
Customers Withdraw Bitcoin from FTX
The numbers back this up. CoinJournal.net tracked on-chain flows and observed an unprecedented pace of Bitcoin withdrawals from exchanges in the aftermath of FTX’s collapse.
Over the 27 days following the first reports about FTX, net withdrawals approached 200,000 BTC. Thousands of Bitcoin holders moved funds off exchanges into secure cold storage.
“FTX was considered tier-one loyalty among exchanges. Its collapse understandably terrified investors. Exchange transparency is strikingly low, and it is often impossible to know what is happening behind the scenes. The movement of Bitcoin off exchanges shows that customers have recognized this,” said Max Coupland, Director at CoinJournal.
Unfortunately, FTX was not the only scandal to rock crypto this year. How does this latest wave of withdrawals differ from earlier panic events?
A Similar Panic Caused by Celsius
On June 12, when Celsius emailed customers to say it was suspending withdrawals from its platform, it sent a shock through investors who held assets there.
Those assets quickly became inaccessible, and customers panicked that funds on other lending platforms might soon face the same fate, spreading fear through the industry.
A key difference at the time was that exchanges themselves were not under direct pressure. Still, as the chart below shows, customers panicked: exchange balances fell by 128,000 BTC in the month after Celsius’s collapse, and more than 100,000 BTC flowed out in the five days following its bankruptcy filing.
Not the Same as Terra’s Death Spiral
The third major shock to the crypto markets this year was Terra’s death spiral in May. In many ways that event started a chain reaction: subsequent bankruptcies and liquidity crises affected Three Arrows Capital, Voyager Digital, Celsius and others.
Notably, trading firm Alameda Research reportedly suffered large losses during that period, and there are allegations that customer deposits from FTX were used to shore up Alameda’s liquidity—linking the later FTX crisis back to Terra in a broader sequence of failures.
However, Terra differed because it was a decentralized financial protocol with a flawed model, not a centralized company that became insolvent. The nature of the crisis therefore produced different customer behavior.
This difference is visible in the exchange inflows and outflows following Terra’s collapse.
In the first few days, large sums of Bitcoin flowed into exchanges. Those funds included reserves held by the Luna Foundation Guard that were sent to exchanges as Terra fought to defend its peg.
After that initial period, inflows and outflows returned to more ordinary patterns without a sustained surge in withdrawals from exchanges.
Summary of 2022
Exchange trust has not been this weak since the 2014 Mt. Gox collapse. Looking across the year’s exchange activity, two events stand out as having most eroded user confidence: the Celsius crisis and the FTX collapse.
How badly crypto’s reputation will be damaged in the long term remains to be seen and will depend on how the industry reforms and reassures users over time.
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Methodology
Data were sourced on-chain. Wallets were matched to known public exchange addresses to track flows in and out of exchanges.