List of Failed Crypto Exchanges

List of Failed Crypto Exchanges

Robert McDougall 

January 9, 2024

Cryptocurrency

Cryptocurrencies' rapid and dramatic price swings over time are referred to as crypto market volatility. What makes the market volatile is its speculative nature. 

However, this is not the only factor contributing to the increased volatility of the crypto market. Its architecture, in particular, lacks a clear regulatory framework and is dependent on the supply and demand of market players, which adds to the market's volatility. 

With the increasing number of cryptocurrency exchanges in this unpredictable and rather shaky industry, numerous exchanges fail in the face of competition. Is the turbulent market, however, the primary reason for these exchanges' failures? 

Join us in our detailed analysis as we investigate failed cryptocurrency exchanges and the causes, lessons learned, and consequences of these failures. 

The Role of Cryptocurrency Exchanges

A cryptocurrency exchange is a company that allows consumers to trade cryptocurrencies. They serve as middlemen between buyers and sellers, allowing users to trade crypto for other crypto assets or traditional fiat currencies. 

With cryptocurrencies becoming a more popular asset globally, the role and demand for more accessible and safe cryptocurrency exchanges is clear. They serve as the primary medium that enables users to access crypto, wherever they are. 

But why do some trusted exchanges fail, leading to losses to their customers?

What Leads Crypto Exchanges To Failure?

Despite the rapid growth and wide popularity of the crypto market over the years, we all know that the failure of popular crypto exchanges has left many traders and investors questioning their preferred platforms. You may never predict the exchange you use is next in the list of failed exchanges. 

While that is something we can't control, it is always possible to learn about the challenges that crypto exchanges face today, and the underlying causes that lead to the downfall of exchanges. Here's what we analyzed:

Common Factors Leading to the Downfall of Crypto Exchanges

Crypto exchange failure is a problem we have seen too often. Some of the most prominent reasons for this include:

  • Hacking: Hacking is a common issue that leads to the downfall of cryptocurrency exchanges. It affects an exchange when hackers attack the platform's web terminal and steal money from 'hot wallets'.
  • Internal system failure: Cryptocurrency exchanges also fall due to internal system errors like system failures or data leaks in the corporation. These issues, if not monitored and handled in time, can impact the security and privacy of user’s activity, putting their assets and funds at risk. For example, the downfall of FTX happened when the exchange faced a system breakdown issue, being unable to meet its user’s system exit requests. This made all the user’s assets and finances exposed, making the company lead to bankruptcy. We will talk more about the FTX bankruptcy incident later in this article. 
  • Government intervention: Lastly, government seizures of popular cryptocurrencies can cause crypto exchanges to fail. This happens when the crypto seizures lead to trading limitations on exchange platforms for the users. Not only does it put the seized assets on hold but also reduces the user's activity on the platform.

The Challenges Faced By Crypto Exchanges In A Volatile Market:

Even with hundreds of crypto exchanges operating around the world today, certain challenges pose a threat to the security and long-term stability of many of these exchanges. Here are some common challenges that exchanges face today: 

Lack of Liquidity: 

During our analysis, we found that 36% of buyers believe the lack of liquidity is one of the biggest problems with exchanges. This is especially true for new and smaller platforms. 

Because liquidity is linked to price volatility, markets require substantial trade volumes to be liquid. Low trade volume leads to wide spreads and therefore large jumps in price when large transactions are made.

Now, when we consider exchanges that face this challenge, the only way the market can improve its liquidity is when a large number of buyers and sellers trade at fair prices.

Custody Issues: 

This problem is linked to the last one, i.e. lack of liquidity. To add a new coin, an exchange often has to connect its system to the new coin's blockchain. 

This means setting up a node, opening wallets, building a place to store clients' crypto assets, making a way to deposit and withdraw the coin, etc.

In this case, the exchange also serves as a custodian for someone else's assets. This often leads to problems like hacker attacks or customers being unable to access their money. 

This is primarily because these custodial wallets — created by the exchange platform for the user’s holding a certain coin — store a large amount of cryptocurrency assets for multiple clients. This makes these wallets an attractive target for hackers, risking both the client’s digital assets and the exchange’s position. 

A List of Failed Crypto Exchanges

Unfortunately, there have been a significant number of exchange platforms and start-ups that have failed over the years. To name a few of the most shocking and unexpected crypto exchange failures, here is what we came across: 

1. FTX

Let's start with the most recent and shocking exchange downfall, i.e., the failure of FTX

You might be wondering how some internal issues can lead to the failure of such a notable crypto exchange at a time when technology keeps on advancing.


Based on the number of trades, FTX was one of the five biggest sites for trading crypto. But In November  2022, the exchange’s system was hacked into, making it impossible to meet the user’s exit requests. Because of this, the company had to file for Chapter 11 bankruptcy in the U.S.

Notably, the problems started on November 2, when the cryptocurrency news site CoinDesk reported that Alameda Research, a quantitative trading company, had close ties to FTX. This company held an investment of $5 billion in the exchange's native token, FTX, holding a huge amount of FTX tokens. 

The news made people worry about what the exchange and its CEO, Sam Bankman-Fried, hid about their debt and ability to pay. That is when Binance, the biggest cryptocurrency exchange, sold all of their FTX tokens to prevent any losses if the exchange failed. 

This made many people want to sell, which put a lot of pressure on the market and caused the token's price to drop a lot. After this rapid change in FTX price, the exchange customers quickly took their money out. 

As we delved deeper into this issue, we found that about $6 billion worth of exit requests were made in 72 hours when the value of FTX declined. Surprisingly, the exchange did not fulfill these exit requests at that time.

Later, it was found out that FTX had sent users' money to Alameda Research for risky trades, and both companies lost a lot of money. The exchange also used some of these funds to buy assets that were hard to sell quickly. 

In bankruptcy papers, it was shown that FTX owes over a million creditors more than $9 billion. Overall, it was a huge loss for FTX users that made this one of the biggest downfalls in the history of crypto exchanges. 

2. Mt. Gox

Japan-based Mt. Gox was a top cryptocurrency exchange, and at the start of 2014, it handled more than 70% of all Bitcoin transfers around the world. However, it doesn't take long for the tables to turn and for crypto exchanges to end up at the lowest end of the market. 

Speaking of which, it only took a few months for this top exchange to go out of business. The exchange was first hacked in 2011 when the hackers invaded into its auditor’s computer and changed the price of Bitcoin to 1 cent. 

But even after this hacking incident took place, the exchange didn’t take any action to improve its system security. This led to one of the worst hacks to date, as almost 850,000 Bitcoins were taken from customer accounts and the company's accounts when it got hacked again in 2014. 

Because of this hack, the price of Bitcoin at that time went from $900 to $418. This was a huge lesson for new and existing exchanges to focus on their company's security measures. 

3. Cryptopia

Cryptopia was a cryptocurrency exchange based in New Zealand. In January 2019, a security breach led to the loss of crypto funds worth millions of dollars. The site had earned a good name since it began operating in 2014. 

So, the breach shocked the whole crypto community and made everyone think about how hackers can get into even the most trusted exchanges.

As we delved deeper, we found that the breach was caused by hackers invading Cryptopia user’s wallets and stealing hefty amounts of crypto assets.

According to our research, the Ethereum network also showed that the hackers first broke into two of the most important Cryptopia wallets. After that, they hit more than 76,000 of the platform's secondary wallets.

The stolen crypto assets were worth roughly between $16 million and $23 million. 

Many people also think that Cryptopia didn't really get hacked and was just trying to get people to leave. After the attack, the exchange had to close and declare bankruptcy. To date, the exact amount of loss, and hackers that carried out this hack are still unknown. 

4. Bitfinex

Another significant crypto exchange failure that shocked the market was Bitfinex. It was in 2016 when Bitcoins worth about $66 million were stolen from this Hong Kong-based cryptocurrency exchange. This was marked as the second-worst hack in the history of Bitcoin at that time. 

On further research, we found that about 2,000 accepted transactions were sent from users' separate wallets to a single wallet. Right after that, the price of Bitcoin fell by 20%, bringing the value of the stolen Bitcoin down to US$58 million.

The Aftermath of Crypto Exchange Failures

Every downfall of a reputed crypto exchange may bring uncertainty to investors, making it hard to determine whether these exchanges are worth using. It's quite normal to feel this wayl, especially with more such cases occurring occasionally. 

Precisely, these issues that lead to the shutdown of exchange platforms don't only impact the exchange but also their customers. While they are often caused by the negligence of people operating these companies, the investors are the ones that suffer the most. 

In most cases, these companies, when facing an issue, don't even offer an explanation or notice to their customers. This leads users' funds to be trapped or lost, with a lack of possibilities to recoup the funds from the bankrupt platforms. 

Role of Regulatory Bodies Against Failed Crypto Exchanges

There are certain actions that regulatory bodies can take against the exchange's bankruptcy. For example, in the U.S., the following regulatory bodies can take action in such situations:

  • The U.S. Securities and Exchange Commission (SEC) can look into the exchange activities to check if it has conducted any fraud or other illegal actions.
  • The SEC can file a lawsuit against the exchange if it breaks trading laws.
  • The Commodity Futures Trading Commission (CFTC) can also check the exchange records and activities for fraud or other illegal actions.
  • The CFTC can take the exchange to court if it breaks any commodity laws.

How to Protect Yourself from Crypto Exchange Failures

We understand that the growing possibility of crypto exchange bankruptcies can be a huge concern for users. You might find it hard to invest or trade on crypto exchanges again. However, you can still invest in crypto safely, and limit the risk of loss if a crypto exchange fails.

Store Your Crypto in Cold Wallets: 

With your crypto held on an exchange, there is always the risk that you lose your funds. Remember, ‘not your keys, not your crypto’. When you are not actively trading crypto, remove it from the exchange and into a personal wallet. You can choose a hot wallet, but the preferred option is a cold wallet.

Hot wallets still have some risk of being hacked, as they are connected to the internet. Cold wallets, on the other hand, are offline crypto storage wallets. Since these wallets are not connected to the internet, they’re secure from hacking or online theft. 

Conclusion 

Overall, it is worth noting that even with the rise of the cryptocurrency market, there is a great space for improvements in crypto exchanges today. 

From the need for more decentralized finance platforms to proper regulation of crypto exchanges, we can only envision a more secure future for investors when these needs are considered. 

But for now, investing in crypto exchanges can only be safer if you practice precautionary measures to protect your digital assets. 

We hope our detailed analysis will help you better understand the reasons behind the downfall of crypto exchanges and how you can secure your assets in such a volatile crypto market.


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