Exchange Failures and Hacks

Exchange failures follow recurring patterns: external hacks drain hot wallets, internal fraud commingles customer funds with proprietary trading, or leverage and illiquid tokens create a gap between reported balances and real assets. Users discover the problem when withdrawals slow, then stop entirely — often after the damage is irreversible.

Mt. Gox (2014) lost hundreds of thousands of Bitcoin to a long-running exploit — customers waited years for bankruptcy proceedings. FTX (2022) revealed that Alameda Research used customer deposits as a backstop for risky bets, while tokenized equity in FTT masked the hole. Celsius and BlockFi showed that CeFi yield products could unwind just as brutally as exchange trading desks when collateral values collapsed.

Insurance and compensation schemes are limited. Many jurisdictions treat exchange balances as unsecured creditor claims in bankruptcy — you may wait in line behind secured lenders. The practical lesson is sizing: treat exchange balances as working capital for trading and fiat ramps, not long-term storage, and withdraw to self-custody when you are not actively using the funds.