- The FDIC often ensures that if a bank falls, it can insure deposits allowing its users to access their funding. Unfortunately, bankrupt crypto companies do not have such luxuries.
- Three Arrows Capital was one of the most significant crypto hedge funds managing almost $10 billion in assets.
- FTX is the major contributor to today’s crypto winter, and some still believe it will cause the fall of the crypto industry.
There have been many side effects of crypto winter, but all lead to the singular end goal, ensuring the fall of the crypto industry. Any consistent crypto trader will claim that there are risks in investing in crypto, one of which is the sudden disappearance of a crypto exchange a trader is using. This is illegal, especially when a firm’s CEO exits the market without notice. Unfortunately, this occurs more often than many would like to admit. It is, therefore, critical to be aware of the kind of crypto exchange platform you’re dealing with. The other is more of a legal sense, resulting in bankrupt crypto companies that cannot fund their users and longers. This happens for several reasons, but it often occurs after a successful crypto hack.
The number of bankrupt crypto companies has significantly increased in less than two years, directly shifting the crypto winter into an ice age.
But what made these companies sink? What drained all their assets, and what happens when a crypto exchange platform is declared bankrupt? These are the various questions we will answer to see why if it goes unchecked, it will lead to the fall of the crypto industry.
What leads to bankrupt crypto exchange platforms
The crypto industry promises great rewards but also significant risks. Most of the time, individuals attribute the direct risks of investing in crypto to an individual crypto trader but fail to look at the bigger picture. Unfortunately, the crypto Industry is a fair venture that is proportionate to its use.
The higher your gain, the more exposed you are to risks. Crypto exchange platforms know this all too well. It is a fact that a crypt exchange that may be less than a decade old has the potential to reach revenue heights of $1 billion. A feat that many have accomplished, although it is also possible for the same crypto exchange to hit rock bottom. The only difference in the term “risk” between a crypto trader and a crypto exchange platform is its execution.
Also, Read FTX trading LTD finally hits rock bottom.
Why do exchanges pose such a risk?
Since the Federal Deposit Insurance Corporation never insures crypto exchanges, their risk factor is much more significant than one aspect. The FDIC often ensures that if a bank falls, it can insure deposits allowing its users to access their funding. Unfortunately, bankrupt crypto companies do not have such luxuries.
In most cases, one hears of a successful crypto hack that siphons most funds from the crypto exchange. Its ability to compensate for the victims of the hack generally determines whether or not it’s headed down the dark road of bankruptcy. Because FDIC does not insure them, crypto exchange platforms generally have to generate the lost funds independently. Some organizations have successfully cushioned themselves during times of crisis, such as Binance. They can compensate for any losses that occurred due to a crypto hack.
Unfortunately, this capability only comes to well-established crypto exchanges and depends on how much damage the crypto hack conducts.
The next major cause of bankruptcy with crypto exchange firms is the mismanagement of funds. More often than not, crypto exchange platforms often reinvest a portion of their funding into other ventures. This ensures a concurrent flow of funding aside from the profits acquired from its trading business. A prime example is seen from last year as FTX CEO Sam BankMan conducted several financial deals, withi led to significant losses in the company’s overall funding.
These two aspects are often the major causes of bankruptcy. Both would result in crypto traders withdrawing vast amounts of funding, and the bankrupt crypto exchange would be unable to keep up.
Bankrupt crypto exchanges that resulted in prolonged crypto winters
The risks of investing in crypto are equally proportional to its rewards. Crypto traders understand this; thus, when crypto winter strikes, the market is often steadily active. Unfortunately, several bankrupt crypto exchanges have resulted in the near fall of the crypto industry. Their influence over the industry was ultimately their undoing and caused massive crypto winters.
Mt Gox, the first bankrupt crypto exchange
Mt Gox was a Tokyo-based crypto exchange with considerable influence over the crypto industry. During the time, crypto was still relatively new to the world and Africa. Its sheer influence over the industry was not worthy. At its peak, the bankrupt crypto exchange handled more than 70% of all Bitcoin transactions worldwide. It had more influence than Binance at the time.
Unfortunately, its massive popularity led to its undoing as it constantly faced bombardment from crypto hackers. In 2011 hackers exploited stolen credentials to transfer bitcoins to their addresses. Unfortunately, blockchain security could have been more sophisticated at the time, leading the flaw to go unnoticed. At the end of the year, the crypto exchange lost thousands of bitcoins to this single network flaw.
In 2014, customers voiced their displeasure at how the company handled their withdrawals poorly. However, MTGox lost over 850,000 bitcoins during the same year due to a significant crypto hack. Soon after, MT Gox declared bankruptcy marking it as the first-ever crypto exchange to do so.
Also, Read Crypto Winter into an ice Age in 2023.
Today MT Gox is seen as the first company to bring about the concept of a crypto winter. Its loss led to a significant drop in bitcoin price. Fortunately, it was a learning curve for crypto exchange platforms today and blockchain security.
Quadriga was a Canadian crypto exchange platform that earned its place on this list because it represented the dangers of having a crypto exchange platform under the sole contol of a single individual. The bankrupt crypto exchange would have the keys to the cold wallets handled by its CEO, the late Gerald Cotten.
This meant that a single individual held the customer funds and allegedly used the funds for personal trading and expenses. The bankrupt company’s lack of proper structural control led to numerous mismanagement of funds and infrastructure. It had no formal bank account or accounting system. The entire setup ran from an encrypted laptop owned by Cotten. The co-founder of Quadriga had identity theft cases that resulted in numerous allegations and suspicions. Unfortunately, the company declared bankruptcy since authorities could not trace the funds. This resulted in a $190 million loss for the crypto industry.
It was also a significant contributor to the crypto winter since the trust of crypto traders all over wavered. This resulted in a steady and slow-paced crypto winter.
Three Arrows Capital
Three Arrows Capital was one of the most significant crypto hedge funds managing almost $10 billion in assets. Its reputation and functionality eased the worries of plenty of crypto traders as they promised reduced risks of investing in crypto. Unfortunately, its sheer confidence in its position and influence would cause a series o evidence leading to the near fall of the crypto industry.
The bankrupt crypto exchange declared bankruptcy due to a liquidity crisis triggered by the bear market in 2022. Its failure was mainly attributed to the fall of UST, a popular stablecoin project at the time. The bankrupt crypto exchange had invested over $500 million in the project, and its failure led to the company falling. The company also borrowed funds from various crypto first, severely affecting their normal functioning. As Three Arrow Capital fell, it dragged along other exchanges, resulting in many bankrupt crypto exchange platforms. Its total debt is approximately $3.5 billion.
This bankrupt crypto exchange also had a massive influence and is one of the few victims of Three Arrow Capital. In November, BlockFi filed for Chapter 11 bankruptcy. The company was also closely affiliated with FTX, further contributing to its downfall. In an unexpected twist, the bankrupt crypto exchange reported owning $275 million to FTX. It also lent over $1 billion of client funds to FTX and Alameda.
This is among the few examples of mismanagement of client funds that resulted in one f the most significant crypto winters ever experienced. BlockFi declared that t woned $1.3 billion from its 50 largest creditors, and it only had $257 million in cash. Unfrotnaley, the platform closed down and is searching for funding to reimburse its creditors.
This list is incomplete without mentioning the most significant crypto collapse in history. FTX is the major contributor to today’s crypto winter, and many still believe it will cause the fall of the crypto industry. After allegations of mishandling its funding surfaced, crypto traders worldwide withdrew themselves from the exchange. Unfortunately, the exchange was unable to keep up.
Its downfall only started there as Binance sold off its FTT holding with sunk FTX tokens, FTT even further. Sensing the imminent danger, crypto traders withdrew over $bilion in under 72 hours, a record time never seen before. It was clear that FTX was tunnelling customer funds to Alameda Research, a closely tied crypto exchange, for risky trading bets. Alameda lost much FTX funding and used dome for relevantly illiquid investments. The exchange filed for bankruptcy resulting in the recent fall of the crypto industry. I am sure you are all aware that in 2022 the risks of investing in crypto received a flashing red banner.
These bankrupt crypto exchange platforms have one thing in common; Mismanagement of client funds. This inevitably highlights another risk of investing in crypto, more so through centralized crypto firms. Knowing how to handle customer funds is crucial to preventing the crypto industry’s fall.
Understanding this has led to the success of other crypto industries such as Binance or KUCoin. The crypto winter has taken its toll despite the slight recovery of the industry. Despite this, any crypto trader must know the crypto exchange platform they use to avoid losing their entire investments.