Cryptocurrency Exchange Risk Report: How Investors Can Protect Themselves After the Collapse of Well-Known Platforms

In the cryptocurrency market, many people only pay attention to the fluctuations of virtual currencies themselves, but often overlook a heavier reality—exchange bankruptcies. Compared to the losses caused by price swings, the damage from exchange closures is often irreparable. Even more alarmingly, this is no longer an isolated incident but a phenomenon that occurs almost every year.

According to CoinMarketCap statistics, there are currently 670 virtual currency exchanges operating worldwide, but the number of defunct exchanges is equally staggering. Understanding why these platforms collapse and mastering the correct methods for choosing exchanges are crucial for every investor.

What should investors prioritize? Four key factors in choosing an exchange

Many novice investors find it difficult to choose among numerous options and end up selecting a platform at random. Little do they realize, this decision could determine the fate of their assets.

Security is the top priority. Before choosing any exchange, do not rely on luck or be attracted by low fees. Focus on indicators such as the platform’s security system, operating licenses, and risk reserves. You can evaluate these by checking whether the exchange has experienced hacking attacks, the background of the technical team, and third-party security audit reports. For licenses and reserves, verify directly on the official website and confirm with the licensing authority to avoid falling for false certifications.

Transaction fees should be a secondary consideration. When security cannot be guaranteed, no matter how low the fees are, it’s meaningless. For example, a small, unknown exchange with a fee of 0.01% versus a reputable, compliant platform with 0.02%—the wiser choice is still the latter, because the risk of the former running away or declaring bankruptcy far outweighs the savings.

Number of supported coins varies by individual needs. Mainstream coins like BTC and ETH are available on almost all platforms, with little difference. But if you want to trade emerging small-cap coins, you need to go to second- or third-tier exchanges, as large platforms cannot meet these needs.

Trading experience is also very important. In extreme market conditions, trading speed determines success or failure. The stability of large platforms’ systems is superior to that of smaller ones, especially during market volatility. Also, ensure that the platform’s interface and chart tools match your trading habits.

How did former star exchanges collapse?

Historically, many once-glorious platforms eventually went bankrupt. Recognizing their pitfalls can help avoid repeating the same mistakes.

MT.Gox (collapsed in 2014): The earliest warning

Founded by the father of eDonkey, Jed McCaleb, in 2010, this Japanese exchange was acquired by Frenchman Mark Karpeles in 2011. After restructuring and expansion, MT.Gox became the world’s largest BTC exchange from 2011 to 2013. At its peak, its trading volume was unmatched.

However, in 2014, MT.Gox was hacked, and 850,000 BTC (about $4.73 billion) were stolen. The platform ultimately declared bankruptcy. This incident marked the first large-scale security crisis in the crypto market.

FCoin (collapsed in 2020): A warning of model collapse

Created by Zhang Jian in May 2018, the author of Blockchain: Defining the Future of Finance and Economics, FCoin became popular with its “trading mining, holding coins for dividends” model. Within half a month of launch, its trading volume surpassed the combined total of the global rankings 2-7.

However, this aggressive model could not be sustained long-term. The high dividends gradually drained the platform’s funds, causing trading volume and the platform’s token FT to plummet. After the founder’s failed rescue efforts and fleeing overseas at the end of 2018, in 2020, it was publicly admitted that the platform could not pay out 7000-13000 BTC. This event demonstrates that even the best marketing models must be built on a sustainable economic foundation.

FTX (collapsed in 2022): The biggest scam in crypto history

FTX was founded by American Sam Bankman-Fried in 2019, just in time for the 2020-2021 bull market. The platform quickly attracted users with innovative products like options and contracts, rising to become the second-largest exchange globally.

But in November 2022, a key investigative report revealed the truth: FTX’s sister company Alameda Research owed $8 billion, with its assets mainly consisting of the illiquid FTT token. After the news broke, the world’s largest exchange Binance announced it would sell all FTT, triggering market panic. Many users rushed to withdraw funds, but FTX was unable to meet the demand, ultimately filing for bankruptcy in less than two weeks.

Even more shocking, FTX misappropriated customer funds to Alameda for high-risk investments. When huge losses occurred, the capital chain was instantly broken. US authorities deemed this “one of the largest financial scams in US history,” and founder SBF was eventually sentenced to 25 years.

By 2025, FTX had initiated three rounds of creditor compensation plans, promising full cash restitution plus interest. However, the compensation was calculated based on the crypto prices at the time of bankruptcy (BTC below $20,000), whereas current prices exceed $100,000, making the actual losses for victims far beyond what can be recovered.

Bittrex (collapsed in 2023): The compliance trap

Founded in 2014, Bittrex was known for its security and was once one of the top three exchanges in the world. However, in April 2023, the US Securities and Exchange Commission (SEC) filed a lawsuit for illegal operation, and a month later, Bittrex filed for bankruptcy protection. This platform, with over 100,000 creditors, had assets and liabilities between $500 million and $1 billion.

Why do exchanges collapse? Analyzing the root causes

Exchange failures usually stem from internal and external factors.

Internal factors include security vulnerabilities, fund misappropriation, and management failures. Many platforms have been hacked, losing user funds; some founders diverted investor assets for risky investments; others failed due to high dividend mechanisms or poor private key management, ultimately losing operational capacity.

External factors mainly involve regulation and market shocks. Governments worldwide are tightening crypto regulations, and some platforms are forced to shut down for non-compliance. Additionally, during bear markets, trading volume shrinks sharply, revenue drops, and exchanges eventually become insolvent and declare bankruptcy.

Will the wave of crypto bankruptcies continue?

Based on data from the past decade, exchange closures happen almost every year. From established platforms in 2013 to regulatory victims in 2023, the bankruptcy list keeps growing. This indicates that as long as the market exists, risks will always be present.

Therefore, as an investor:

1. Never believe in any exchange’s permanence. Even reputable platforms can collapse overnight.
2. Always prioritize security. Licenses, audits, risk reserves, and security records—these are must-check items.
3. Diversify risk. Do not concentrate all funds on a single platform; spreading assets across multiple platforms can effectively hedge against the risk of a single platform’s failure.
4. Stay vigilant. Pay attention to official announcements, financial health, regulatory developments, and promptly identify risk signals.

The crypto market is still evolving, and exchange bankruptcies will continue to occur. But as long as investors stay alert, make informed choices, and manage their assets carefully, they can maximize protection against the risks of bankruptcy.