The biggest crypto bankruptcies

But in reality, there are bankruptcies and hacks in every sector of the economy. And no company ever consciously plans its bankruptcy. Often, a series of ridiculous accidents and inept management actions at that moment lead to the inevitable consequences.

The market reacts differently to each such event because a lot depends on the amount of money lost. Let's remember the most notorious events in this sphere.

Mt.Gox exchange

The most significant theft in the cryptocurrency world did not happen overnight, and the funds were withdrawn systematically throughout 2011-2013. It was the largest cryptocurrency exchange; at that time, it held about 80% of all bitcoin trades worldwide.

When the exchange management discovered all the security problems, the attackers discreetly withdrew about 850 thousand bitcoins from the exchange. This became the largest hack in the history of cryptocurrencies.

At the time of the theft, it was about half a billion US dollars; today, this amount would be at least $30 billion (which is roughly comparable to the annual budget of Croatia).

A hack of this magnitude was even one of the reasons for Bitcoin's crushing fall in 2014.

After investigations, it became clear that security problems had existed since at least 2011, and this allowed hackers to steal large amounts of funds stealthily, disguising the theft for security systems as placing funds on "cold" wallets.

It was recently reported that Mt.Gox users will finally start getting partial refunds for lost cryptocurrencies, with compensation tentatively beginning to arrive as early as the end of 2023.

Bitfinex exchange

The company in 2014 gave the world the concept of stablecoins, the creators of Tether. By many accounts, they were the ones who contributed to the 2017 cryptocurrency price rally by overstating the actual amount of reserves in USDT collateral.

The exchange's problems were not related to this forgery, though. Back then, exchange executives managed to split the businesses and delay the proceedings so that Bitfinex would not suffer financially.

But in 2016, 120 thousand bitcoins were stolen from the exchange's wallets. The exchange did not pay compensation then but issued its debt token, BFX, which traded below 40 cents at launch. But then, in April 2017, the exchange exchanged the token for dollars one-to-one.

However, according to various media reports, the procedure did not go smoothly; some owners of the stolen funds are still trying to get compensation.

BTC-e exchange (also WEX)

At its closure, it was one of the largest crypto exchanges, which enjoyed considerable popularity in China.

But in mid-2017, it became known that most of the bitcoins from the previously mentioned Mt.Gox hack were found on wallets controlled by Alexander Vinnik, one of the co-owners of the BTC-e exchange.

The FBI eventually shut the exchange down due to allegations of money laundering and financial fraud. At least 485 thousand ETH was withdrawn and laundered through various wallets. Judging by the gradual disclosure to the users of this site, BTC-e was not the most virtuous crypto exchange, and the charge of laundering criminal funds brought by federal agents had severe grounds.

Unfortunately, former customers are unsuccessfully battling for a refund with its "successor" exchange WEX.

Coincheck exchange

The hack of the exchange's hot wallet occurred in 2018. Then, 523 million NEM (about $500 million) was stolen from it.

The theft completely ruined the management's plans for the expansion and development of the exchange, and the moral and reputational damage was so significant that the japanese financial regulator FSA introduced some of the world's strictest rules for crypto exchanges after this event.

In order to get out of the incident, the exchange itself sold 100% of its shares for $34 million.

BitGrail exchange

Almost immediately after the Coincheck hack, 17 million XRB/Nano (about $200 million) was stolen from BitGrail wallets.

The investigation showed that the circumstances of the hack were very dubious and indicated that the owners of the exchange were directly or indirectly involved in the theft.

Even though the story was published, the traders did not seek a refund. But after the official authorities of the country got involved, under the pressure of the accusations, the owner of the exchange was forced to give the contents of all the cryptocurrency wallets of the company as compensation for the claims of the victims.

Terra Luna Protocol

This story began a crypto apocalypse that triggered a string of bankruptcies for a dozen other companies.

The main goal of the protocol's creation was to manage the UST stablecoin, which could be used as a payment instrument without having to store real dollars in any country's bank accounts. The company relied on an algorithmic mechanism and a price stabilization protocol to achieve this goal.

Everything was fine as long as the market rose, so the protocol remained profitable. But when the market turned around, the complex laws of maths kicked in. Terra Luna's algorithms, similar in their principle to a pyramid scheme, caused the value of UST to decouple from the dollar due to the devaluation of the Terra (Luna) token that backed it, which fell in value by 99% in a matter of hours and continued to fall by 90-99% of the previous day's price every day.

The situation shook the crypto market as many significant players held their assets in Luna, UST and the related Anchor protocol.

We won't describe each episode separately; just list the biggest bankruptcies caused by this failure:

• cryptocurrency bank Celsius,
• hedge fund Three Arrows Capital (3AC),
• crypto broker Voyager Digital,
• chinese company Babel Finance,
• crypto lenders BlockFi and Hodlnaut,
• and mining company Core Scientific.

Blockchain.com and Genesis were also affected. Subsequently, the latter also filed for bankruptcy. And because Genesis is part of the cryptocurrency conglomerate Digital Currency Group, even the large fund Grayscale could be a potential candidate for bankruptcy.

FTX exchange and Alameda investment fund

Perhaps the most high-profile failure was the bankruptcy of FTX, the second-largest crypto exchange in the United States at the time.

The collapse of the exchange began with a Coindesk article that greatly frightened investors. The investigation stated that about half of Alameda Research's assets were "exchange tokens out of thin air" that the two companies were lending to each other.

The flight of investors led to the fact that the FTT token fell in price by 30% in a day and by 90% in a week, and FTX exchange clients began to withdraw their money from their accounts en masse.

It is worth noting that no financial organization in the world can cope with such a stress test, and together with terrible management in both companies, these events led to the collapse of the exchange and the start of the collapse of the entire crypto market in 2022.

Conclusion

Despite seeming stability, high-tech crypto companies are subject to the same risks as any financial institution.

Exchange users who are not professional traders but only wish to buy or sell cryptocurrency can exchange funds on decentralized exchanges and exchangers.

And it is better to store cryptocurrency in between transactions on non-custodial wallets.

If you are a trader and always need funds on the exchange, keep only the minimum necessary for trading there or distribute funds on several independent exchanges.

Also, remember the pattern — several times, growth cycles have been interrupted by major scandals or bankruptcies; keep track of them, and sell your cryptocurrencies in time if this is part of your medium-term plans.