Exchange bankruptcy wave review: Understanding risks to make better choices

In the cryptocurrency market, investors face risks far beyond asset price fluctuations. Compared to the ups and downs of coin prices, the losses caused by exchange failures are even more difficult to bear—user funds evaporate instantly, and years of accumulated wealth are lost in an instant. Worryingly, this is not an isolated incident but a common phenomenon throughout the development of cryptocurrencies.

This article will review well-known exchange failures in recent years, analyze the reasons behind them, and discuss preventive strategies investors should adopt.

The Ledger of Cryptocurrency Exchanges’ Life and Death

According to market data, there are currently 670 active virtual currency exchanges, but the number of failed or suspended exchanges is equally large. These failures include former industry giants as well as promising emerging platforms.

Early hacker attack victims: MT.Gox (collapsed in 2014)

MT.Gox, nicknamed “Gate of Gox,” was once the world’s largest Bitcoin exchange. This Japanese exchange was founded by Jed McCaleb, the father of eDonkey, in 2010, and later taken over by Mark Karpeles (known in the industry as “Fat Frenchman”). Between 2011 and 2013, MT.Gox supported multiple fiat currencies and benefited from rising Bitcoin prices, once dominating 85% of global trading volume.

However, in 2014, a hacker attack completely destroyed this empire. Hackers stole 850,000 Bitcoins, worth about $473 million at the time. This incident not only led MT.Gox to declare bankruptcy but also became the most severe security loss in cryptocurrency history, dealing a huge blow to the entire industry.

Lessons from the founder embezzling funds: Yes-BTC (collapsed in 2015), FCoin (collapsed in 2020)

In 2015, Taiwan’s well-known crypto exchange Yes-BTC experienced a fund embezzlement scandal. Chairman He Zhaoyi owed over 6 million yuan to underground lenders and secretly absconded with more than 1,600 Bitcoins from users. This incident exposed governance flaws, leaving user assets completely unprotected.

A similar tragedy repeated in 2020. FCoin was founded in 2018 by Zhang Jian, author of “Blockchain: Defining the Future of Finance and Economics.” The platform rapidly rose to prominence with its “trading and mining, holding coins for dividends” innovative mechanism, reaching the top global trading volume within half a month, even surpassing the combined volume of the 2nd to 7th exchanges.

However, the high dividend promise was ultimately unsustainable. Due to design flaws and competitive pressure, the platform’s token FT plummeted, and trading volume shrank sharply. The founder was unable to turn the tide, fleeing overseas, leaving a shortfall of 7,000 to 13,000 Bitcoins.

The most shocking bankruptcy event in recent years: FTX (collapsed in 2022)

If past failures evoke regret, the collapse of FTX shocked the global financial markets.

FTX was founded in 2019 by American entrepreneur Sam Bankman-Fried (SBF), positioning itself as a futures trading platform. Riding the bull market wave of 2020-2021, FTX launched options, contracts, and other innovative products, quickly attracting a large user base and capital inflow. By mid-2022, FTX had risen to become the second-largest exchange globally, with a valuation once reaching $32 billion.

But all of this was built on a fragile foundation. FTX’s expansion relied heavily on mass acquisitions and high leverage operations, deeply tied to its related company Alameda Research. This structure seemed to enhance market influence but actually laid a liquidity trap.

In November 2022, a key investigation revealed the truth: Alameda Research owed $8 billion, with most assets in the highly illiquid native token FTT. After the news broke, the world’s largest crypto exchange quickly announced the sale of FTT, triggering panic. FTT’s price plummeted, user confidence collapsed, and a large-scale bank run ensued.

Even more shocking, the investigation uncovered that FTX had transferred customer funds to Alameda for high-risk investments. When Alameda’s losses could not be covered, the entire capital chain broke instantly. The U.S. Department of Justice deemed this a scam, and SBF was ultimately sentenced to 25 years in prison.

Currently, FTX has initiated a compensation plan. Since 2025, three rounds of repayments have been executed, promising victims full cash compensation. However, the amount is based on the cryptocurrency prices at the time of bankruptcy, when Bitcoin was below $20,000, whereas now it exceeds $100,000—this also reflects the cost of delayed compensation.

The decline of seasoned platforms: Bittrex (collapsed in 2023)

Bittrex was founded in 2014 by former employees of tech giants and was known for its security. At its peak, it held nearly 23% market share, listed over 300 coins, and was one of the top three exchanges worldwide.

In April 2023, the U.S. Securities and Exchange Commission accused Bittrex of violating regulations. One month later, the platform filed for bankruptcy protection. Its assets and liabilities ranged between $500 million and $1 billion, with over 100,000 creditors. A once-trusted platform came to an end.

Other exchange closures

Besides the above cases, there are also Bitfloor (2013), 796 (2015), DrogonEX (2019), ZB (2022), AEX (2022), Hoo (2022), JPEX (2023), and others that have closed or suspended operations. These incidents reflect systemic issues in the industry’s development.

Deep-rooted Causes of Exchange Failures

Internal factors: Loss of control

Security vulnerabilities are the most deadly threat. Although many large platforms have advanced security systems, hackers are relentless. MT.Gox’s experience warns us that even industry leaders can fall due to technical lapses.

Internal misconduct also poses huge risks. Embezzling customer funds for investments or transfers is a common fault in platforms like FTX and Yes-BTC. Leaders’ unethical behavior often results in the ultimate loss of user assets.

Management flaws manifest as unsustainable business models. FCoin’s unlimited high dividend system, JPEX’s false licenses, etc., stem from governance loopholes. Improper private key management can also lead to irretrievable assets—such as QuadrigaCX, a Canadian exchange that lost access to $145 million worth of crypto after its founder’s sudden death.

External factors: Regulation and market shocks

Regulatory storms are often fatal. As the crypto market expands, governments worldwide tighten regulations. AEX closed in 2013 due to regulatory pressure; South Korea’s crackdown on exchanges in 2019 led to many platforms exiting the market; Singapore’s enforcement against JPEX in 2023 was similarly ruthless.

Market volatility tests platforms’ risk tolerance. During bull markets, the cake is big enough for most platforms to survive. But in bear markets, trading volume shrinks, fee income drops sharply, and insolvent platforms have only one way out—failure. Bittrex collapsed under the weight of a bear market.

How to Safely Choose a Cryptocurrency Exchange

Safety is the top priority

After reviewing so many failure cases, safety must be the primary consideration. Key points for evaluating platform security include:

• Technical security: Check past security incidents, response measures, technical team background, third-party audits
• Regulatory licenses: Verify the platform’s business licenses and regulatory permits through official channels to prevent fake certifications like JPEX
• Risk reserves: Confirm whether the platform has established user fund protection mechanisms
• Fund segregation: Prefer platforms that keep user funds separate from company operational funds

Other considerations

Trading fees rank below safety. Even small exchanges with fees as low as 0.01%, compared to reputable compliant platforms at 0.02%, carry much higher risks.

Number of coins depends on trading needs. Mainstream coins are widely available, but small-cap new tokens are usually only listed on second- or third-tier platforms.

Trading experience affects daily use. Large platforms generally excel in system stability, order execution speed, chart tools, etc., which are especially crucial during extreme market conditions.

Common FAQs about Exchange Bankruptcies

Q: If an exchange collapses, can I still retrieve my assets?

A: It depends on the cause of failure and the jurisdiction. If it’s a scam or run-off, recovery is unlikely. If it enters bankruptcy liquidation, partial refunds are usually made proportionally. The FTX case shows that even with sufficient assets, liquidation payouts can take years.

Q: How long after a failure can I get my funds back?

A: There’s no fixed answer. FTX filed for bankruptcy in November 2022, and the first repayment round only started in 2025. During this period, funds are frozen, and recovery depends entirely on the progress of bankruptcy proceedings. Investors need patience and mental preparation.

Q: How to choose among many exchanges?

A: Prioritize platforms with long-term operational history, comprehensive compliance frameworks, and sufficient risk reserves. Also, be aware that no platform can guarantee 100% safety—diversification, moderate trading, and timely withdrawals are best practices.

The cryptocurrency market is full of opportunities, but risks are equally present. Understanding the history and risk features of exchanges is the first step in protecting your assets. When choosing a platform, avoid blindly following trends; safety is always worth paying a little more in fees.