Why Do Cryptocurrency Exchanges Frequently Go Bankrupt? How Should Investors Respond

In the cryptocurrency market, price fluctuations are indeed intense, but many overlook a bigger risk—exchange bankruptcy. Compared to the volatility of virtual assets, the collapse of a trading platform often deals a more devastating blow to investors, with losses that are often beyond expectations. It is worth noting that this is not a rare phenomenon; rather, it is a tragedy that occurs almost every year. So, which former trading platforms have gone bankrupt, what are the root causes, and how can investors avoid risks?

Disappeared Well-Known Trading Platforms

According to data, the total number of virtual currency trading platforms worldwide has reached around 670, but at the same time, many platforms have quietly vanished. These bankrupt exchanges include Mt.Gox, FCoin, FTX, among others. They were once industry leaders but ultimately could not escape decline.

Mt.Gox (Bankruptcy in 2014)

Mt.Gox (“Gate of Gox”) was a Japanese virtual currency exchange founded by the father of eMule, Jed McCaleb, in July 2010. In March 2011, McCaleb sold it to Frenchman Mark Karpeles. After upgrades and expanding supported coins, Mt.Gox soared between 2011 and 2013 to become the world’s largest Bitcoin exchange. However, in a hacking attack in 2014, the platform lost 850,000 BTC (worth about $473 million at the time), and subsequently declared bankruptcy.

Yes-BTC (Bankruptcy in 2015)

This platform was one of Taiwan’s three major crypto exchanges. In February 2015, it suffered a theft and withdrawal scandal. Its chairman, He Zhaoyi, owed over 6 million yuan to underground banks, and after secretly swallowing over 1,600 BTC from users, he disappeared. The exchange eventually announced closure.

FCoin (Bankruptcy in 2020)

Founded in May 2018 by Zhang Jian, author of Blockchain: Defining the Future of Finance and Economic Restructuring, FCoin gained rapid fame with its “trading and mining, holding coins for dividends” gimmick. Within half a month of launch, its trading volume topped the global rankings, surpassing the combined volume of the 2nd to 7th exchanges. However, due to industry competition and an unsustainable high-dividend mechanism, the platform’s token FT and trading volume plummeted. After the founder failed to rescue the market at the end of 2018 and left overseas, in 2020, it publicly admitted that the platform could no longer redeem 7,000 to 13,000 BTC.

FTX (Bankruptcy in 2022)

FTX was founded by American Sam Bankman-Fried in 2019, with the full name “Futures Exchange.” During the market boom of 2020-2021, FTX’s trading volume continued to rise, once ranking as the second-largest global platform. But in November 2022, the platform was exposed for serious violations, leading to massive user withdrawals, a sharp drop in its platform token FTT, and ultimately bankruptcy and restructuring.

Bittrex (Bankruptcy in 2023)

Bittrex (“B Network”) was established in 2014 by former employees of major tech companies, known for its security. In 2018, it held nearly 23% market share with over 300 supported coins, ranking among the top three exchanges globally. However, in April 2023, U.S. regulators accused it of illegal operations. Just one month later, the exchange filed for bankruptcy protection, with assets and liabilities between $500 million and $1 billion, and over 100,000 creditors.

Beyond these cases, many other platforms have also gone bankrupt, including Bitfloor (2013), 796 (2015), DrogonEX (2019), ZB (2022), AEX (2022), Hoo (2022), JPEX (2023), etc. What are the common roots behind these failures?

Deep Causes of Exchange Bankruptcy

The collapse of trading platforms mainly stems from two categories of factors: internal management issues and external environmental shocks.

Internal Factors Leading to Bankruptcy

Technical Security Vulnerabilities

A robust security system is the lifeline of an exchange. Once defenses fail, hackers can exploit the breach to plunder user assets. The bankruptcy of Mt.Gox is the most painful lesson. In fact, many large platforms have experienced hacking incidents, but with sufficient reserves, they could quickly patch vulnerabilities.

Misappropriation of Assets by Founders

Some exchange management teams divert user funds for investments or private use, which is the direct cause of the demise of FTX and Yes-BTC. Such incidents often end with insolvency, leaving investors with total losses.

Operational Mismanagement

The downfall of FCoin fundamentally originated from its unsustainable high-dividend mechanism and constantly changing rules, which triggered large-scale community exodus. Some exchanges also fell into trouble due to poor private key management, such as a Canadian exchange that lost access after the founder’s unexpected death, resulting in a loss of $145 million in crypto assets.

External Environmental Causes of Bankruptcy

Increased Regulatory Pressure

As the crypto market expands, regulatory authorities worldwide are stepping up enforcement, cracking down on illegal platforms. The veteran exchange AEX, for example, closed amid regulatory storms in 2013.

Market Cycle Fluctuations

During bull markets, virtual asset prices soar, exchange revenues are abundant, and the industry flourishes. But when bear markets arrive, trading volumes sharply decline, causing many platforms to face insolvency. Even with cost-cutting measures, reversing bankruptcy is difficult; Bittrex is a typical example.

How to Scientifically Choose a Virtual Currency Trading Platform

Faced with numerous exchanges, novice investors often feel overwhelmed. Making the right choice is crucial; reckless decisions can lead to disastrous consequences.

Prioritize Security

Since many platforms have already failed, and even survivors cannot guarantee absolute safety, security should be the top priority when choosing an exchange. Focus on examining the platform’s security architecture, compliance licenses, risk reserve systems, etc. You can check the platform’s history of hacking incidents, emergency response mechanisms, technical team credentials, and independent audit reports through relevant channels. Additionally, verify licenses with regulatory authorities to avoid falling into false compliance traps.

Compare Fees on a Level Playing Field

Only when your funds are secure should you consider fee costs. When platforms have similar security levels, prioritize those with lower fees. However, if a lesser-known small platform offers significantly lower fees than a reputable large platform, beware of being lured by the low price, as small platforms are often at higher risk of running away or going bankrupt.

Choose Coins Based on Trading Needs

Mainstream coins like Bitcoin and Ethereum are supported by almost all platforms, with little difference. But if you want to trade small-cap or emerging tokens, you may need to use second- or third-tier platforms, as large exchanges have strict listing standards.

Pay Attention to Trading Experience

For active traders, execution speed is critical, especially in extreme market conditions. Larger platforms generally outperform smaller ones in system performance. Also, ensure that the trading interface, chart tools, and other features meet your trading habits.

Investment Advice in the Face of Cryptocurrency Bankruptcy Risks

Given the persistent risk of exchange bankruptcy in the crypto ecosystem, investors should:

First, do not concentrate all assets on a single exchange. Diversify holdings to reduce the risk of single points of failure.

Second, regularly monitor platform developments. Stay informed about the platform’s financing progress, founder movements, industry evaluations, and other signals. Exit promptly if anomalies are detected.

Third, prioritize platforms with brand backing, multiple regulatory approvals, and transparent operations. Although such platforms may have slightly higher fees, they carry the lowest long-term risks.

Fourth, consider decentralized exchanges (DEX). While DEXs may lag in liquidity and trading experience compared to centralized platforms, they completely eliminate the risk of platform bankruptcy.

The wave of exchange bankruptcies in the crypto market serves as a reminder that choosing a trading platform is no trivial matter. Only through careful evaluation and prudent selection can one navigate this high-risk market steadily and safely.