FTX Collapse: Were Crypto Realized Losses Less Than Terra Luna & 3AC?

The crypto world has been a rollercoaster, especially in 2022. Remember the gut-wrenching Terra Luna crash, the Three Arrows Capital (3AC) implosion, and the Celsius network freeze? These events sent shockwaves through the market, leaving many investors reeling. Then came the FTX exchange collapse, another major blow. But when we talk about the financial damage, how does the FTX fallout compare to these earlier crises? Let’s dive into data from Chainalysis, a leading blockchain analytics firm, to get some clarity.

Putting FTX Losses in Perspective: Was it Really the ‘Heaviest’ Hit?

Chainalysis aimed to contextualize the FTX debacle by comparing its peak weekly realized losses to those of previous major crypto downturns in 2022. They analyzed on-chain data to understand the actual financial impact investors experienced during these turbulent times.

First, let’s understand what “realized losses” mean in this context. Chainalysis calculated these losses by tracking cryptocurrency movements from personal wallets. They looked at the value of assets when they entered a wallet and subtracted the value when those assets were transferred out. This difference is considered a realized loss if the value decreased during that period. Think of it like this: if you bought Bitcoin at $30,000 and sold it at $20,000, you’ve realized a $10,000 loss.

Now, let’s look at the numbers:

• Terra Luna (LUNC) De-pegging (May 2022): This event triggered a massive sell-off and panic, resulting in a peak of $20.5 billion in weekly realized losses. Imagine the collective gasp across the crypto community!
• Three Arrows Capital (3AC) and Celsius Collapse (June 2022): The contagion from Terra Luna spread, leading to the downfall of major players like 3AC and Celsius. This period saw an even greater peak of $33 billion in weekly realized losses. This was arguably the most painful period in terms of realized losses.
• FTX Collapse (November 2022): The sudden implosion of FTX, once a crypto giant, sent shockwaves again. However, according to Chainalysis data, the peak weekly realized losses during the FTX scandal were $9 billion, recorded in the week starting November 7th.

Here’s a table summarizing the comparison:

These figures might be surprising. While the FTX collapse was undoubtedly a significant event, Chainalysis’ data suggests that in terms of realized losses, it wasn’t the most devastating event of 2022. Their report highlighted that:

“The data implies that the most damaging [crypto] events were already behind investors by the time the FTX disaster occurred.”

This suggests that by the time FTX unraveled, many investors had already absorbed the brunt of the market downturn from earlier events like Terra Luna and the 3AC/Celsius failures.

Important Caveats about Realized Loss Data

It’s crucial to understand the nuances of this data. Chainalysis themselves point out some important considerations:

• Potential Overestimation: Their methodology treats every transfer between wallets as a potential sale. This might inflate realized loss figures because not every transfer necessarily represents a sale at a loss. It’s more of an upper limit estimate.
• Frozen Funds Not Included: The data doesn’t account for customer funds frozen on the FTX exchange. This is a significant point because many users have suffered losses due to their inability to access their funds on the platform, which isn’t captured in ‘realized losses’ calculated this way.

Chainalysis emphasizes that we should consider these values as an “upper limit” for realized losses because they can’t definitively know if every transaction represents a liquidation.

Beyond Realized Losses: Unrealized Losses Tell a Different Story

While Chainalysis focused on realized losses, it’s important to look at another metric: unrealized losses. These are paper losses – the losses you would incur if you sold your assets at the current market price, but you haven’t actually sold them yet.

CryptoQuant, another on-chain analytics firm, provides insights into Bitcoin’s net unrealized losses. Interestingly, their data paints a slightly different picture regarding the FTX impact.

• Bitcoin Unrealized Losses After FTX: CryptoQuant reported that unrealized losses for Bitcoin (BTC) peaked at -31.7% after the FTX collapse.
• Bitcoin Unrealized Losses After Terra/3AC/Celsius: In comparison, unrealized losses for Bitcoin were -19.4% following the Terra Luna and 3AC/Celsius meltdowns.

This suggests that while realized losses might have been lower for FTX compared to earlier events, the unrealized losses for Bitcoin were actually more severe in the wake of the FTX crash. This could indicate that the FTX event caused a deeper level of market fear and uncertainty, pushing Bitcoin’s price down further, even if fewer people actually sold at a loss immediately.

Glassnode, another reputable analytics firm, echoed this sentiment. In a tweet on November 17th, they highlighted the significant degree of unrealized losses after FTX, drawing comparisons to the peak of the 2018 bear market, which saw unrealized losses of -36%. This further emphasizes the severity of the FTX impact on overall market sentiment and unrealized portfolio values.

Realized vs. Unrealized Losses: Why the Distinction Matters

Understanding the difference between realized and unrealized losses is key to navigating the volatile crypto market:

• Unrealized (Paper) Losses: These reflect the current market value of your holdings compared to your purchase price. They fluctuate with market prices and only become ‘real’ when you sell. They are indicators of market sentiment and potential future realized losses if investors panic-sell.
• Realized Losses: These are the actual losses you’ve locked in by selling assets at a lower price than you bought them for. They represent concrete financial impact.

Key Takeaways: FTX in the Context of 2022 Crypto Storms

So, what can we conclude from this data?

• Realized losses from FTX were significant but potentially less than earlier crises: Chainalysis data suggests that the Terra Luna and 3AC/Celsius events resulted in higher peak weekly realized losses than the FTX collapse.
• Unrealized losses after FTX were substantial: Data from CryptoQuant and Glassnode indicates that unrealized losses, particularly for Bitcoin, were more severe after FTX compared to the earlier crises, reflecting deep market concern.
• Context is crucial: While the numbers provide valuable insights, it’s essential to consider the limitations of the data and the broader market context. The FTX collapse had far-reaching consequences beyond just immediate realized losses, including damage to market trust and regulatory scrutiny.
• Market Resilience: Despite the series of major shocks in 2022, the crypto market continues to operate. Understanding these historical loss events helps investors and the industry learn and potentially build more robust systems for the future.

The crypto winter of 2022 was undoubtedly harsh, marked by a succession of high-profile failures. While Chainalysis data offers a perspective that realized losses during the FTX event weren’t the absolute peak of the year, it’s crucial to consider the broader picture. The FTX collapse was a watershed moment that continues to shape the crypto landscape, highlighting the importance of risk management, transparency, and investor protection in this evolving industry.