Bank runs typically occur in panic situations, when customers believe that their bank — or, in cryptocurrency markets, a centralised exchange (CEX) — may become insolvent or go bankrupt. However, banks often do not have enough cash on hand to replace all of the withdrawn funds, as they typically only maintain a limited cash reserve and often loan out or invest deposited funds. This can be devastating for both the bank and its customers.
Bank runs can be triggered by rumours, such as stories that a bank is running low on cash reserves. In the context of cryptocurrencies, a bank run can occur if a large number of customers become concerned about the stability or security of a particular exchange and start withdrawing funds all at once. Another factor involves reports of hacks or vulnerabilities in the exchange, which can cause fear and panic, ultimately leading to customers withdrawing their funds as quickly as possible.
