From Boom to Bust: The Crypto Exchange Collapse Chronicles

We all have that friend who deposits large sums into platforms like Binance or Coinbase, swearing that nothing can touch these behemoths, but it’s time for some folks to get a wake-up call: even the big shots, no matter how massive their trade volumes, can crash and burn. What exactly is the mistake we should not make? Is it just putting money into an exchange? The answer is simple: the real goof-up is trusting a hefty chunk of our funds to these platforms and keeping that money there indefinitely.

As experienced sorcerers, we believe that delving into the past is one of the most efficient ways to raise awareness. Take Mt. Gox, for instance. Many thought it was untouchable until it crumbled, leaving thousands in shambles.

While we’ve covered many of these ideas in our previous posts, sometimes it’s essential to revisit real-life tragedies to drive the point home. Today, we’ll explore some of the bankruptcies and closures that sent shockwaves through the crypto world, which throws light on why we shouldn’t view centralized exchanges as impregnable fortresses (this is the post you’ll want to share with that friend who’s gone all-in on Bitfinex and thinks nothing could go wrong). The crypto sphere offers incredible freedoms, but with great freedom comes great responsibility. Better safe than sorry.

1. Mt. Gox (2014):

This collapse stands out as perhaps the most notorious bankruptcy episode in the crypto sector. In February 2014, the company abruptly halted withdrawals, citing technical glitches… By the month’s end, its website vanished from the internet without a trace.

Mt. Gox’s losses amounted to over 850,000 BTC between 2011 and January 2014 (equivalent to more than $50 billion today) due to several undetected security breaches… It was the world’s largest BTC exchange, responsible for streamlining a whopping 70% of Bitcoin transactions.

2. Quadriga CX (2019):

An event that completely wiped out the investments of over 100,000 clients overnight. It all began with the tragic passing of Gerald Cotten (the exchange’s young founder) in India at the age of just 30. What soon came to light was that Cotten alone held the private keys to access client funds.

The controversy and speculation surrounding the incident continue unabated. It’s known that Quadriga was grappling with financial troubles in the lead-up to the catastrophe, and the company’s founder, Cotten, signed a will mere weeks before his untimely passing.

Many questions remain unanswered, and the victims have yet to see any compensation.

3. FTX (2022):

This bankruptcy was a significant catalyst for the 2022 crypto winter, as FTX was among the top 5 crypto exchanges in terms of trading volume. The fallout was significant, causing the downfall of multiple companies associated with the firm founded by Sam Bankman-Fried. At the time of its closure, FTX was facing a deficit of nearly $7 billion.

In the end, it came to light that FTX had been involved in high-risk commercial activities using its clients’ funds, closely tied to Alameda Research. Sam Bankman-Fried, aged 32, was handed a 25-year federal prison sentence on fraud and money laundering charges, with an obligation to repay over $11 billion.

4. Cryptopia (2019):

In January 2019, this New Zealand exchange was hit by a major hack, losing over $15 million. Forced to declare bankruptcy and close its doors, its challenges didn’t stop there: fast forward to 2021, during the liquidation process, a former employee managed to siphon $170,000 from a platform wallet.

In March 2024, a high court ruling in Wellington came down in favor of affected consumers. Shortly after that, admins in charge of distribution started emailing users, explaining who qualified to file a claim and providing guidance on how to do so.

Admins are still in the process of verifying the victims’ balances. Although there isn’t a specific date for refunds, those managing the process have expressed their intention to begin before 2024 ends.

5. Coincheck (2018):

Though not a bankruptcy, this case is noteworthy. Over six years ago, the company suffered a theft valued at $534 million in NEM (XEM) – a cryptocurrency that, in early 2018, ranked among the top 10 projects by market capitalization. Bloomberg later revealed that Coincheck failed to comply with a crucial rule required by Tokyo authorities: a license for cryptoasset operations. However, the company had been granted a temporary permit to continue its operations.

In April 2018, news broke that Monex Group would acquire Coincheck, with plans to purchase 100% of its shares – the acquisition proceeded smoothly… A month earlier, the exchange resumed withdrawals and began reimbursing customers. While one might view this as a “happy ending”, it still serves as a cautionary tale.

Make sure to follow us on X, where we regularly share updates about the thrilling events our team is involved in! // We’re actively working on Hamza.biz, the pioneering Web3 e-commerce platform powered by the Loadpipe protocol… Click here to explore the roadmap we’ve crafted for Hamza.