Crypto Exchange Failures: A Deep Dive into Infamous Incidents [2023]

Salomon Kisters

Apr 14, 2023

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Over the years, crypto investors have experienced several upsets in the shape of crypto exchange failures, resulting in significant financial losses and general instability in the market.

The crypto industry has been a rollercoaster ride since its inception in 2009 when the first Bitcoin block was created. Since then, the cryptocurrency and blockchain industry has grown extraordinarily well, with Bitcoin hitting $69,000 and the total crypto market cap reaching the $3 trillion mark in November 2021.

And as is the case with any other booming financial sector, we saw a large number of cryptocurrency start-ups and platforms emerge in the past few years. Among these, the highest number is that of cryptocurrency trading exchange platforms.

Unfortunately, a substantial number of the crypto exchanges launched in the past years ended up as failures due to multiple reasons. This article will dive deep into the topic and discuss some of the most infamous crypto exchange failures of all time.

How Many Crypto Exchanges Have Failed?

Today, centralized crypto exchanges play a vital role in the growth of the cryptocurrency industry. They serve as doorways for most traders and investors to access the blockchain and enter the world of decentralized finance. These exchanges allow people to purchase crypto tokens using fiat currencies.

Yet, for a variety of reasons (described later), a number of exchanges have collapsed abruptly or ceased to exist altogether over the years. Such unexpected closures not only cause financial losses to the users of these exchanges but also prove to be damaging to the cryptocurrency industry in general as it diminishes the investors’ confidence in this sector.

Determining how many exchanges have unexpectedly gone out of business is difficult. However, last year, Coinjournal.net published a report that goes deep into the topic. The report studies trends in the rise or decline of failed crypto exchanges during 2018-2022. Apart from that, it also explores the most common reasons witnessed behind the exchange failure incidents.

According to the report, failed exchanges in 2018 were at least 23. The number skyrocketed to 252% in 2019 and increased a further 17% in 2020. During 2021, this number remained almost the same as the previous year. On the other hand, the first six months of 2022 saw a 55% decrease in the number of crypto exchanges shutting down.

However, the LUNA crash in May and later FTX bankruptcy in November resulted in a long series of cryptocurrency business crashes, including lending protocols, cryptocurrency exchanges, and financial firms.

The Biggest Crypto Exchange Disasters

Following is a list of some of the most infamous crypto exchange failures to date.

Mt. Gox

The Mt. Gox incident was one of the most notorious crypto exchange failures in the history of the cryptocurrency industry. Founded in 2010, the platform began facilitating Bitcoin trading in 2011. By 2014, the exchange had become the largest Bitcoin trading platform on the internet, handling more than 70% of the total Bitcoin transactions.

The first signs of trouble became apparent in 2013 when the platform began to experience various technical issues and bugs. However, on February 23rd, 2014, the exchange suddenly shut down, reporting a security breach that resulted in the loss of 850,000 BTC (750,000 BTC belonged to its own customers). At the time of the incident, the total value of these Bitcoin tokens was estimated at $450 million.

The Mt. Gox failure has had a significant impact on the cryptocurrency industry. Moreover, it highlighted the need for greater transparency, security, and regulation in the crypto space.

Bitfinex

The 2016 security breach in the Hong Kong-based crypto exchange, Bitfinex, was another episode that shook the cryptocurrency industry to its core. At the time, the exchange was among the largest crypto trading platforms by market cap. On August 2, 2016, the platform experienced a lethal cyber-attack in which anonymous hackers stole 119,756 BTC, valued at around $72 million at that time (and $3.2 billion according to the current prices).

After the hacking attack, the company immediately launched an investigation with law enforcement agencies. On top of that, it also offered a $3.5 million reward for anyone who would provide any information leading to the recovery of the stolen amount. However, only a small portion of the stolen funds has been recovered to this day.

Since the incident, Bitfinex has improved its security and introduced several safety measures. The exchange continues to provide its crypto trading platform to users worldwide and is among the ten largest exchanges by trading volume.

QuadrigaCX

Quadriga failure is another notable example of how poor administrative management can lead to disasters in crypto exchanges. Founded in 2013 by Quadriga Fintech Solutions, QuadrigaCX was the biggest cryptocurrency exchange in Canada at that time. The platform abruptly stopped functioning in 2019 and filed for bankruptcy with over 215.7 million CAD in liabilities and 28 million CAD in assets.

The company announced they had lost the private keys and access to the cold wallet holding customer funds. On investigation of the matter, it was revealed that the company had a serious lack of control and oversight with the platform and users’ funds. All of the money under the company’s custody was controlled by only one person, i.e., Gerald Cotten – founder and CEO of QuadrigaCX.

Unlike most centralized cryptocurrency exchanges, QuadrigaCX had no bank account or accounting system. The entire setup was being run by an encrypted laptop owned by Cotten. Further investigations by the Ontario Security Commission (OSC) discovered that Cotten was using customers’ money to pay other customers, proving the exchange to be a Ponzi scheme. Moreover, Cotten was also using this money to finance his trading losses and lavish lifestyle.

Cryptopia

Cryptopia was a New Zealand-based cryptocurrency exchange that faced a security breach in January 2019, which resulted in the loss of millions of dollars’ worth of crypto funds. The platform had been operating since 2014 and had built a solid reputation over the years. The breach, thus, came as a shocking blow to the entire crypto community and made everyone think about how even reliable exchanges can be vulnerable to hackers.

The subsequent investigation revealed that the breach was a result of a highly sophisticated and intricate hacking operation. The hackers managed to get access to Cryptopia wallets, which allowed them to steal large sums of crypto funds. Data from the Ethereum network revealed that first, the hackers got into two of the core Cryptopia wallets. After that, they attacked over 76,000 other secondary wallets of the platform.

However, even after multiple investigations, the hackers remain unknown. Several reports suggest that the stolen crypto assets are worth somewhere around $16 million to $23 million. Many also believe that Cryptopia didn’t actually get hacked and pulled off an exit scam. Following the attack, the exchange was forced to shut down and file for bankruptcy.

FTX

The recent FTX collapse is perhaps the biggest and the most unexpected crypto exchange failure in the history of the cryptocurrency industry. FTX was among the five biggest crypto trading platforms by trading volume. However, on November 11, 2022, FTX declared insolvency and failed to fulfill withdrawal demands. As a result, the company had to file for Chapter 11 bankruptcy in the US.

The problems surfaced as early as November 2nd when the crypto news site, CoinDesk, published a story about Alameda Research – a quantitative trading firm closely linked with FTX – holding a position valued at $5 billion in FTX, the native token of the FTX exchange. The news raised concerns regarding the undisclosed leverage and solvency of the exchange and its CEO, Sam Bankman-Fried.

After the story went public, Binance – the biggest cryptocurrency exchange – decided to sell all the FTX tokens it held. This introduced a lot of selling pressure in the market, causing the token’s price to sink considerably. In the aftermath of the recent price actions, the FTX users rushed to withdraw their funds from the exchange. An approximate total of $6 billion of withdrawal orders were made within 72 hours, which the exchange failed to fulfill.

Later, it was discovered that FTX apparently funneled customers’ funds to Alameda Research for risky trades and lost a significant amount. It also used some of these funds to purchase relatively illiquid assets. Bankruptcy filings revealed that FTX owes over $9 billion to more than 1 million creditors.

Conclusion

The cryptocurrency industry has been through multiple crypto exchange collapsing events. While many of these were caused by security breaches and bear market trends, exit scams, poor administration, and financial mismanagement played an equally disastrous role. Every crypto exchange failure incident reasserts the importance of decentralized finance and highlights the problems with our traditional centralized financial models.

As far as centralized exchanges are concerned, it is clear that a proper regulatory framework is needed to protect users from such mishaps in the future. Moreover, investors and traders on their end can ensure the security of their funds by using cryptocurrency wallets.

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