Since 2014, a staggering 368 exchanges have closed their doors, raising concerns about the safety of utilising centralised exchanges.
The rise of cryptocurrencies has disrupted the traditional financial world and presented investors with a new and exciting asset class. However, with the innovation and opportunity that comes with cryptocurrencies, there are also new challenges and risks, particularly in the realm of cryptocurrency exchanges. According to data from Cryptowisser's Exchange Graveyard, since 2014, a total of 368 exchanges have shut down, with 161 of them simply vanishing without explanation, underscoring the importance of caution when dealing with cryptocurrency exchanges.
'161 Exchanges (42%) have just vanished'
The data reveals that the number of exchange failures has been on the rise in recent years, with 215 closures, or 58% of all closures, occurring between 2020 and 2023. In 2020, 31 exchanges shut down voluntarily, while 34 disappeared with no explanation. The Dutch exchange NLexch and Chilean exchange Chilebit were shut down by their respective governments. In 2021, 51 exchanges closed down, with 17 of them just disappearing. One notable case was the South African exchange Africrypt, whose founders disappeared with $3.6 billion worth of user funds. The exchange was allegedly hacked, and the founders claimed they could not access the funds to return them to users.
In 2022, 79 exchanges shut down, making it the worst year for cryptocurrency exchange failures. Many of these were due to business reasons, while others were due to scams or regulatory reasons. One notable case was that of the Chinese exchange Huobi, which reportedly shut down due to regulatory pressure from the Chinese government. In the first few weeks of 2023, 10 exchanges have already shut down, emphasizing that the cryptocurrency industry is still grappling with regulating exchanges and ensuring the security of user funds.
'11th Jan 2021, 16 exchanges went down'
The reasons for cryptocurrency exchange failures are varied. Some exchanges had red flags from the beginning, such as being registered in countries with lax regulatory oversight or lacking transparency about their management team. The US-based exchange Cryptsy shut down in 2016 after its founder was accused of stealing millions of dollars in user funds. The exchange was not insured, and users lost an estimated $5 million. Others failed due to external factors, such as hacks and fraud.
The Fall of MT. GOX
The Mt. Gox hack was a major event in the cryptocurrency world that took place in 2014. Mt. Gox was a Tokyo-based cryptocurrency exchange that was initially created as a platform for trading cards for the game Magic: The Gathering. However, as cryptocurrencies became more popular, it switched to exchanging Bitcoin and other cryptocurrencies. At its peak, Mt. Gox was the largest Bitcoin exchange globally, handling about 70% of all BTC trading volume.
Unfortunately, the exchange's prominence made it a target for hackers, and from 2011 to 2014, it experienced several security breaches. The final hack saw the theft of 650,000–850,000 BTC, resulting in the exchange's insolvency and shutdown. It was later revealed that the hack had been taking place since 2011 and was due to the theft of the exchange's unencrypted private key. The Mt. Gox hack had a major impact on the price of Bitcoin, causing it to slip by as much as 23%. The aftermath of the hack saw Mt. Gox file for bankruptcy and face multiple class-action lawsuits
The Mystery of QuadrigaCX
QuadrigaCX was a Canadian cryptocurrency exchange founded in 2013 by Gerald Cotten. The exchange quickly grew in popularity and at its peak, it was considered one of the largest cryptocurrency exchanges in Canada, processing millions of dollars in transactions each day. However, in early 2019, the exchange and its users were hit with a devastating blow when Cotten, the company's CEO, passed away suddenly while on a trip to India. According to official reports, Cotten died from complications related to Crohn's disease.
The problem was that Cotten was the only person who had access to the exchange's cold wallets, which were used to store the majority of the company's digital assets. With his sudden passing, no one knew the passwords or recovery keys for these wallets, and the funds were essentially locked away. This resulted in a massive scandal, with investors claiming that the exchange owed them millions of dollars that they were unable to access. The case quickly became an international sensation and is often cited as an example of the need for greater regulation and oversight in the cryptocurrency industry.
FTX Meltdown
One of the most significant cryptocurrency exchange failures in recent times was the FTX collapse in November 2022. The demise of FTX was attributed to potential leverage and solvency issues involving its affiliate trading firm Alameda Research, as reported by CoinDesk. The collapse of FTX had a profound impact on the volatile crypto market, causing it to lose billions of dollars and falling below a $1 trillion valuation. FTX experienced a liquidity crisis and sought bailout funds, with rival exchange Binance initially considering purchasing portions of the company but ultimately withdrawing. In the wake of the crisis,
FTX's CEO, Sam Bank Fieldman, resigned and the company filed for bankruptcy on November 11, 2022. In the hours following the bankruptcy announcement, FTX was possibly hacked, leading to the loss of hundreds of millions worth of tokens. The FTX debacle serves as a reminder of the significant risks involved with cryptocurrency exchanges and highlights the need for investors to take a cautious approach and use best practices when investing in digital assets
Einstein Exchange
The closure of Canadian cryptocurrency exchange, Einstein Exchange, in 2019 resulted in a devastating loss for customers who were collectively owed over $16 million in cryptocurrency. An investigation by the British Columbia Securities Commission revealed that the exchange was bankrupt and had only $45,000 in assets to pay its customers. The exchange was embroiled in multiple legal battles, and owed money to its employees and other firms. This serves as a cautionary tale, underscoring the importance of due diligence when investing in the volatile world of cryptocurrencies. As a centralized exchange, Einstein Exchange held control over customers' bitcoin deposits in its accounts, a practice similar to that of traditional banks and major crypto exchanges
How to Stay Safe
These cases underscore the importance of caution when using cryptocurrency exchanges. While many exchanges are reputable and secure, the history of failures shows that it's critical to do your research before using a new platform. It's important to choose exchanges that are registered in countries with strong regulatory oversight and that are transparent about their management team. It's also important to use best practices when handling digital assets, such as taking control of your keys by having a cold storage. In addition, it's important to spread out your investments across multiple exchanges to ensure that even if one exchange fails, you won't lose all of your funds. Staying informed about news and developments in the cryptocurrency industry is also crucial to keep up with any changes that could affect your investments.
Latest Regulatory Changes
The regulatory oversight is needed to protect users from the risks associated with cryptocurrency exchanges. Several countries have already introduced regulatory frameworks for cryptocurrency exchanges, including Japan, which introduced a licensing system for exchanges in 2017, and the United States, which requires exchanges to register with the Financial Crimes Enforcement Network (FinCEN) and adhere to anti-money laundering (AML) and know-your-customer (KYC) regulations. However, the regulatory environment is still in its early stages and more needs to be done to protect investors.
Overview
The rise of cryptocurrencies has brought both innovation and disruption to the financial world, but also introduced new challenges and risks, particularly with cryptocurrency exchanges. The alarming history of exchange failures highlights the importance of exercising extreme caution when using cryptocurrency platforms. It is crucial to conduct thorough research and select reputable exchanges, taking into consideration factors such as regulatory compliance, transparency, and security. It is also essential to take control of your keys and use cold storage to protect digital assets, as well as diversify investments across multiple exchanges to mitigate risks.
Additionally, staying informed about industry news, developments, and regulatory changes is essential to stay ahead of the curve and protect your investments. Although some countries have implemented regulatory frameworks for cryptocurrency exchanges, there is still a long way to go in protecting investors from the various risks associated with the volatile cryptocurrency industry. As the popularity and value of cryptocurrencies continue to grow, remaining vigilant and using best practices to ensure the security of digital assets is critical.