What to do When Crypto Exchanges go Bankrupt

Crypto investors are on high alert as news of crypto exchanges going bankrupt continues to make headlines. With big players like FTX, Voyager Digital, and Celcius filing for bankruptcy, it’s understandable why many investors are growing uneasy about the future of crypto. In this article, we’ll explore why crypto exchanges go bankrupt, how it affects investors, and what steps you can take to keep your investments safe.

Why Crypto Exchanges Go Bankrupt

There are several reasons why crypto exchanges go bankrupt. One of the main reasons is careless investment ventures. Some exchanges may invest in high-risk ventures without considering the consequences. Additionally, the dip in prices of top crypto coins like Bitcoin and Ethereum can also contribute to the financial instability of crypto exchanges.

Another reason why crypto exchanges go bankrupt is the lack of strict regulations. Unlike traditional financial institutions that are strictly regulated by government bodies like the SEC, cryptocurrency exchanges operate in a largely unregulated environment. This has led some exchanges to operate on risky models, which can result in liquidity problems and coin bankruptcy. On the other hand, new crypto regulations, especially in the United States, can cause exchanges to be suspended for not complying with government regulations.

How Bankrupt Crypto Exchanges Affect Investors

When a crypto exchange goes bankrupt, it can be devastating for investors who have stored their assets on the platform. Unlike traditional financial institutions that are insured by the FDIC, crypto exchanges do not have insurance for users’ assets. This means that when a crypto exchange goes bankrupt, investors may lose their assets without any recourse.

Protecting Your Investments

So, what can you do to protect your investments when a crypto exchange goes bankrupt? First and foremost, it’s important to research and choose reputable exchanges with a solid track record. Look for exchanges that have implemented strict security measures and have a good reputation in the industry.

Additionally, it’s important to keep your crypto assets in a secure wallet that you control. This way, even if the exchange goes bankrupt, your assets will still be safe. Avoid leaving your assets on the exchange for extended periods and regularly transfer them to your personal wallet.

Another way to protect your investments is to diversify your portfolio. Don’t put all your eggs in one basket and invest in multiple coins and exchanges. This way, if one exchange goes bankrupt or a particular coin loses value, you won’t lose all your investments.

What Happens When Cryptocurrency Exchanges Go Bankrupt: Understanding Your Investment Risk

If you’re invested in cryptocurrencies, it’s essential to be aware of the risks associated with crypto exchange bankruptcies. Unlike traditional banks, cryptocurrencies aren’t federally protected or insured. This means that in the event of a crypto exchange collapse, there’s no guarantee that your funds will be returned to you.

Crypto Exchanges: Intermediaries with No Regulations

Cryptocurrencies are decentralised, but exchanges are still intermediaries controlled by a central authority. However, there are no regulations in place to ensure that your assets are protected. This means that in bankrupt crypto events like the recent collapse of FTX, there’s no way to guarantee that your funds will be returned to you. The government cannot step in to help you recoup your investments in a cryptocurrency exchange since there is no regulatory framework.

What Happens to Your Funds When a Crypto Exchange Goes Bankrupt?

Suppose a crypto exchange files for bankruptcy, the return of your funds is ultimately up to the discretion of the individual platform, especially if it’s centralised. They hold custody of your wallet, and when the crypto exchange goes bankrupt, your assets are frozen, even though you have a contract with the platform upon signing up. This means you won’t be able to withdraw the funds from your custodial wallet.

If you’re using a non-custodial wallet, you won’t face this problem since you have sole ownership of your private keys. However, the main investors affected by this are those who opted for custodial wallets of the exchanges. This puts them at higher risk of losing their investments if the exchange goes bankrupt.

Can You Get Paid Back Your Investments in a Crypto Exchange Bankruptcy?

If a crypto exchange goes bankrupt, it will likely face Chapter 11 debtors’ rules on debtor-creditor recovery. Under chapter 11, the insolvent crypto exchange must produce a detailed schedule of assets and liabilities along with other financial statements and reports. While the process is ongoing, the company, lawyers and bankruptcy judge will decide who gets what.

In the legal code, the payments will be made to secured creditors first. When those obligations are met, unsecured creditors are paid their debts next with what’s left of the assets. In general, investors are the last in line to get paid back their funds.

When the pool of assets is calculated, everyone will be notified of the pro rata share they receive. This means there will be a proportionate allocation of the assets based on the stakeholders’ priority. Unfortunately, this puts investors at risk during a crypto exchange collapse because there’s no assurance that they’ll get their money back after everything’s been said and done.

Crypto Exchanges That Went Bankrupt in 2022: A Recap

The year 2022 has been a tumultuous one for the crypto industry, with a significant drop in Bitcoin’s value and the collapse of major crypto exchanges like FTX. Let’s take a closer look at some of the exchanges that filed for bankruptcy in 2022.

FTX Exchange

One of the biggest players in the crypto industry, FTX, went bankrupt in November 2022. The exchange was on the verge of merging with its rival Binance, but the deal fell through, leading to a liquidity crisis that eventually led to its collapse. Within a 10-day period, FTX had filed for bankruptcy, leaving its affiliate Alameda Research with a position valued at $5 billion in FTT, FTX’s native token. The collapse raised concerns over the platform’s undisclosed leverage and solvency, leading the new CEO brought in to oversee the bankruptcy process to declare it a “complete failure of corporate controls.”

BlockFi

Two weeks after FTX’s collapse, BlockFi, which relied on a $400 million credit facility provided by FTX, also filed for bankruptcy. The platform filed for Chapter 11 bankruptcy and intended to allow some of its 450,000 users to withdraw their funds, provided they had a non-interest-bearing BlockFi wallet account.

Three Arrows Capital

Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, was the first major crypto firm to announce bankruptcy in 2022. The bankruptcy came after the collapse of the cryptocurrency Luna and stablecoin TerraUSD in May of the same year. Although 3AC was reported to have $10 billion early in 2022, it began bankruptcy proceedings in the British Virgin Islands as early as June. Those overseeing the 3AC liquidations reported that the founders of the crypto company fled overseas and were uncooperative in efforts to recover creditors’ assets.

Voyager Digital

New Jersey-based crypto lender Voyager Digital filed for bankruptcy in July 2022, after 3AC defaulted on a crypto loan worth over $650 million. The company hoped to move quickly through the US court system after selling its assets for $1.4 billion in crypto to FTX. However, the sale fell through following FTX’s bankruptcy issue, forcing Voyager to file for bankruptcy and reopen discussions with potential buyers, including Binance exchange.

Celsius Network

Celsius Network, another crypto lender, was also brought down by the collapse of TerraUSD and Luna. However, its bankruptcy case was messier than Voyager’s due to fraud investigations, disparate treatment of customer accounts, customer privacy, and spending on a new Bitcoin mining facility. The bankruptcy judge assigned to Celsius’ case appointed an examiner to investigate whether the company operated as a Ponzi scheme. Although Celsius welcomed the independent review of its finances, it expressed concern over overlapping investigations made by its creditors, state security regulators, and the bankruptcy examiner.

How to Safeguard Your Crypto Assets in the Face of Exchange Bankruptcy

Crypto exchanges filing for bankruptcy is a harsh reality that investors must prepare for. As an investor, what actions should you take to ensure the security of your assets in the event of an exchange going bankrupt? Here are some steps you can take to safeguard your crypto assets:

Stay Calm and Act with a Cool Head

In times of crisis, it’s essential to remain calm and avoid making impulsive decisions. Take a step back and reflect on your investment goals. Are you trading for long-term or short-term gains? This will help guide you in making the right decision. Panic selling can lead to significant losses, so it’s crucial to remain level-headed.

Store Your Coins in a Non-Custodial Wallet

When it comes to storing your crypto assets, cold storage is a must. By using a non-custodial wallet, you can take control of your assets and private keys, eliminating the exchange’s control over your assets. This will ensure that only you have access to your wallet and assets, providing a layer of security.

Assess the Situation and Act Accordingly

The unfortunate reality is that crypto exchange bankruptcies are happening. While not all exchanges are facing this issue, it’s crucial to take steps to protect your assets. With the current market trend, it’s best to store your crypto assets in cold storage rather than leaving them in the exchange’s built-in hot wallet. This will help safeguard your assets in the event of an exchange going bankrupt.

Evaluate the Future

The current developments in the crypto market are critical in determining the future of the cryptocurrency market. Will there be a widespread call for government regulation? Will these regulations benefit or harm the market? It’s essential to stay up-to-date with the latest news and developments in the market to make informed decisions.

Conclusion

Crypto exchange bankruptcy is a harsh reality that investors must prepare for. By staying calm, using non-custodial wallets, assessing the situation, and evaluating the future, you can safeguard your crypto assets and minimize losses in the event of an exchange going bankrupt. Always remember to invest wisely and avoid making impulsive decisions that could lead to significant losses.