Why Do Exchanges Fail Frequently? A Risk Prevention Guide Every Crypto Investor Must Know

In the digital asset investment space, people are often attracted by price fluctuations but tend to overlook a more deadly risk—exchange insolvency. Compared to simple cryptocurrency price movements, the asset losses caused by exchange bankruptcy are often more unpredictable and harder to recover. Unfortunately, this is not an isolated incident but a common issue in the crypto world.

According to CoinMarketCap statistics, there are currently 670 active cryptocurrency exchanges, but the same number of exchanges have gone bankrupt or closed down. This article will delve into these failure cases, their root causes, and how investors can make smarter choices.

Review of Notable Exchange Failures in Recent Years

FTX: The most shocking collapse in recent years

In November 2022, the US-based cryptocurrency exchange FTX declared bankruptcy in less than two weeks, recognized by US authorities as “one of the largest financial scams in history.” Once ranked as the second-largest exchange globally, its rapid expansion concealed enormous risks.

FTX’s founder Sam Bankman-Fried (SBF) used large-scale acquisitions and high leverage to quickly increase market share. However, its affiliated company Alameda Research carried debts of up to $8 billion, with most assets in highly illiquid self-issued tokens FTT. When the world’s largest exchange decided to sell FTT, it triggered a chain reaction—FTT prices collapsed, users panicked and withdrew funds, ultimately leading to a liquidity crisis.

More seriously, evidence showed that FTX embezzled customer funds for high-risk investments via Alameda, most of which suffered heavy losses. SBF was eventually sentenced to 25 years in prison. After bankruptcy, FTX launched a compensation plan, promising full cash reimbursement at the cryptocurrency prices at the time of bankruptcy, but due to significant increases in crypto prices, the actual payout ratio shrank accordingly.

Mt. Gox: The fall of a former giant

Once accounting for over 70% of global BTC trading volume, Mt. Gox was hacked in 2014, losing up to 850,000 bitcoins (worth about $473 million at the time), and ultimately declared bankruptcy. This incident became a classic lesson in the security crisis of crypto exchanges.

FCoin’s “High Dividend Trap”

Launched in 2018, FCoin quickly gained popularity with its “trade mining, holding coins for dividends” model, with trading volume surpassing the combined total of exchanges ranked 2-7 globally within half a month. However, unsustainable high dividend promises and frequent rule changes eventually angered the community. In 2020, founder Zhang Jian fled overseas, and the platform claimed it could not repay user assets ranging from 7,000 to 13,000 BTC.

Yes-BTC and Bittrex failures

Taiwan’s well-known exchange Yes-BTC experienced a withdrawal crisis in 2015 due to the chairman embezzling user funds, leading to the closure of its website. The US-based Bittrex also filed for bankruptcy protection in 2023 after being sued by US regulators for illegal operations, involving over 100,000 creditors.

Deep Root Causes of Exchange Failures

Management Deficiencies

Security vulnerabilities: Any breach in defense systems can lead to hackers stealing user funds. While many large exchanges have experienced similar attacks, their ample funds allow them to recover, unlike smaller exchanges.

Fund misappropriation: Management divert user assets for investments or expansion, which is a common reason for the collapse of platforms like FTX and Yes-BTC. When investments suffer losses, insolvency becomes inevitable.

Poor mechanism design: FCoin’s excessive dividend promises and constantly changing rules eventually eroded user confidence. Some exchanges also suffer from chaotic private key management, making assets inaccessible.

External Regulatory Pressure

As the crypto market expands, government regulation intensifies. The US frequently conducts enforcement actions, China enforces comprehensive bans, and countries like Singapore strengthen financial framework requirements. Many exchanges are forced to close if they cannot meet regulatory standards.

Market Cyclical Risks

During bull markets, high trading volumes support many platforms to survive. However, in bear markets, trading volume shrinks sharply, platform revenues plummet, and many exchanges relying on trading fees ultimately cannot sustain operations.

How Should Investors Choose an Exchange

Prioritize Security Over Fees

Security should be the top priority. Check for security certifications, risk reserves, past attack records, and response measures. Even if fees are 0.01% higher, choose large, licensed, compliant platforms rather than gambling on small exchanges that might shut down.

Evaluate Coin Coverage

Mainstream coins like BTC and ETH are available on most exchanges. If you need to trade small-cap coins, consider second- or third-tier exchanges.

Trading Experience and Liquidity

Speed is especially critical during extreme market conditions. Large exchanges generally offer more stable systems and deeper liquidity than smaller platforms.

Regulatory and Licensing Verification

Directly verify with licensing authorities whether the exchange is officially licensed to prevent scams like JPEX with fake licenses.

What to Do After an Exchange Fails

Can assets be recovered? It depends on the nature of the bankruptcy. If it’s a scam or run-off, recovery is almost impossible. If it’s insolvency, partial refunds are usually made proportionally, but patience is required as legal procedures take time (e.g., FTX took over 3 years to start payouts).

Liquidation timeline: It depends on the bankruptcy laws of the jurisdiction. Fully recovering losses is not common; the amount investors can recover is often lower than expected.

Conclusion

Exchange insolvency is not a black swan but a common systemic risk in the crypto market. Investors must realize that choosing a secure exchange and practicing prudent fund management are equally important. Prioritize regulatory compliance and platform scale, and avoid falling into bigger risks by chasing high returns or low fees—that is the right approach for long-term participation in cryptocurrency investing.