Crypto Bankruptcies

The crypto markets have been unpredictable due to black swan events that have occurred throughout the years. We wish there were a better way to say this, but there's not: trust isn't a word well-suited for crypto. Not yet. Because often, even deep research doesn't suffice, and even the experts end up investing in disasters waiting to happen.

Crypto has been around for almost 14 challenging years. What started with Satoshi's bitcoin whitepaper in late 2008 has since evolved into a $1 trillion industry. The path hasn't been easy, thanks to the most gruesome black swan events creating vacuums that nullified years' worth of progress within days.

Many crypto companies have gone bust over the years due to significant hacks, frauds, or mismanagement, wiping away billions of dollars in investor funds, and leading to layoffs at crypto companies. One of the greatest highlights of the crypto era was the Mt. Gox breach in 2014that left a dent of 850,000 bitcoins (04 ). That, however, was just the start. There have been many other bankruptcies to date. In this post, we will look at the history of all major crypto bankruptcies:

2023 Crypto Bankruptcies

Genesis, January 2023

2023 began with a thud as crypto lender Genesis dropped its 15-page Chapter 11 bankruptcy filing and 83-page bankruptcy plan in January. Genesis, the crypto lending subsidiary of industry giant Digital Currency Group, had a rough year in 2022. In June of 2022, Genesis confirmed a significant loan loss with an unnamed counterparty, later learned to be Three Arrows Capital, a crypto hedge that also filed for bankruptcy (July 2022).

The second half of 2022 proved challenging for the crypto world, culminating in the collapse of FTX and its sister company Alameda Research in November. Genesis reportedly had $175 million in assets locked on the now-shuttered FTX exchange. Genesis also had a lending relationship with Alameda. Within days of the FTX collapse, Genesis halted redemptions at its lending unit.

By January 19th, the crypto lender filed for Chapter 11 bankruptcy in a Manhattan court, filing its bankruptcy plan the following day.

Top 9 Crypto Bankruptcies Of 2022

The 2022 bear market has severely affected some of the most prominent crypto firms, bringing them down brutally. Particularly, June and July saw a merciless bloodbath throughout crypto. Let's look at the top bankruptcies that shocked the crypto community in 2022.

1. FTX, November 2022

In 2022, FTX, a top-five exchange by trading volume, became insolvent and couldn’t fulfill customer withdrawals. It filed for Chapter 11 bankruptcy in the U.S. on November 11, 2022.

FTX’s troubles began following a November news report that Alameda Research, a crypto trading firm closely tied to the exchange, had liabilities of $8 billion and most of its equity in FTT, the native token of the FTX exchange and a relatively illiquid one.

The report prompted Binance, the world’s largest crypto exchange, to sell off its FTT holdings, which sunk the token’s price. Sensing the imminent turmoil, users rushed to withdraw $6 billion from FTX in under 72 hours, and the exchange couldn’t fulfill the withdrawals.

It appears that FTX was funneling customer funds to Alameda Research for risky trading bets, and Alameda lost a great deal of it and used some for relatively illiquid investments. The exchange filed for bankruptcy because it couldn’t fulfill customer withdrawals. Under bankruptcy proceedings, FTX has a new leadership team trying to salvage the remaining funds left in the corporate coffers to redeem customer withdrawals to the best possible extent.

FTX almost got bailed out when Binance signed an agreement to acquire it in November but Binance backed out after performing due diligence.Bankruptcy filings reveal that FTX owes money to over 1 million creditors, with a total deficit of $9 billion.

2. Three Arrows Capital, July 2022

Three Arrows Capital (3AC) was one of the largest crypto hedge funds, managing almost $10 billion in assets. The fund declared bankruptcy as a result of a liquidity crisis triggered by the bear market.

We can trace its failure back to the collapse of UST, one of the most popular stablecoin projects. 3AC had invested around $500 million in the project, which eventually collapsed, taking it to zero.

Moreover, 3AC held leveraged positions across DeFi protocols that were liquidated due to BTC and ETH price drops. The firm had borrowed funds from popular crypto firms like Blockchain.com, Voyager Digital, Genesis, and BlockFi, all of which were affected by the firm’s bankruptcy. According to reports, 3AC's total debt is $3.5 billion.

3. BlockFi, November 2022

In November, crypto lending platform BlockFi filed for Chapter 11 bankruptcy. The company had major exposure to FTX, which collapsed in the same month, leading it to also file for bankruptcy. In an unexpected twist, BlockFi reported owing $275 million to FTX US and having also lent over $1 billion of clients’ funds to FTX and its sister trading firm Alameda.

BlockFi declared that it owed $1.3 billion to its 50 largest creditors and had $257 million in cash on hand. The company has halted the withdrawal of customer deposits.

4. Core Scientific, December 2022

In December 2022, Core Scientific, one of the biggest Bitcoin mining firms, filed for Chapter 11 bankruptcy. The price of Bitcoin sank significantly in 2022 to a point where mining wasn’t profitable for Core Scientific. The publicly-traded company reported hundreds of millions of dollars in losses, including $435 million in the three months prior to September 2022, before filing for bankruptcy.

Core Scientific declared assets of $1.4 billion and liabilities of $1.3 billion to around 1,000 to 5,000 creditors. The company entered a prepackaged bankruptcy, which entails negotiating with creditors in advance of bankruptcy proceedings. Unlike most companies on this list, Core Scientific owes most of its debt to institutional investors and not retail. The company has arranged a restructuring that'll see many lenders swap their debt for equity.

Core Scientific has continued mining Bitcoin despite filing for bankruptcy. It accounts for 10% of the computing power on the Bitcoin network.

5. Voyager Digital, July 2022

Voyager Digital was a U.S based crypto exchange that declared bankruptcy following a $660 million default from 3AC. The platform paused withdrawals at the beginning of July but assured the public at the time that it would continue operations. The exchange used $75 million of a 15,000 BTC revolving loan from Alameda Research to offset its exposure to the debts that 3AC was unable to repay.

It also stated that it has $137 million in cash and cryptocurrency on hand. However, with 3AC filing bankruptcy, the hopes of Voyager were shattered to recover the amount. The exchange now owes over $1.3 billion to 100,000 creditors.

6. Celsius, June 2022

Celsius Network was a crypto lending and staking platform that spiraled into bankruptcy due to a liquidity crisis caused by the ongoing crypto bear market. The Luna-UST crash only made matters worse for Celsius and pushed the firm further down the hole.

The first signs of trouble became apparent to the community when the firm abruptly halted all user withdrawals and transferred millions of dollars from Aave to FTX for unknown reasons.

Celsius held leveraged holdings in several DeFi protocols that were liquidated because of the severe bear market. The lack of risk hedging to secure the funds only further worsened the case for Celsius. According to bankruptcy court records, Celsius has acknowledged a balance-sheet deficit of up to $1.2 billion.

7. Babel Finance, June 2022

Babel Finance was a Hong Kong-based crypto lender that also went bust due to a liquidity crisis caused by the ongoing bear market. The company held unhedged positions in proprietary trading accounts that tallied significant losses. This forced the liquidation of trading accounts and altogether wiped off 8,000 BTC and 56,000 ETH. In total, the company lost about $280 million of customer funds.

The inadequacy of risk management has been identified as the primary cause of Babel’s collapse. However, the company now intends to convert $150 million in creditor debt into convertible bonds to raise $300 million. It also expects to get $200 million in revolving credit.

8. Hodlnaut, August 2022

Hodlnaut is a crypto lender that has been placed under interim judicial management by the Singapore Court for creditor protection. The firm recently paused user withdrawals due to difficult market conditions, stating that its objective was to stabilize liquidity and preserve assets while working on a long-term solution.

Hodlnaut also withdrew its application for a license from the Monetary Authority of Singapore after receiving in-principle approval from the central bank in March. As a result, token swaps and deposits have been halted. However, there is no information on the amount owed to creditors or the exact cause for halting operations.

9. Zipmex, July 2022

Zipmex was a Thai crypto exchange that filed for debt relief in Singapore following a $53 million default from Babel Finance and Celcius. The exchange had paused user withdrawals following a combination of circumstances beyond its control. However, it later resumed withdrawals for some altcoins.

The Singapore court has now granted the exchange three months of creditor protection. It can engage with authorities and establish a strategy to handle its exposure to the crisis caused due to Babel Finance and Celsius. According to the Asset Protection Group of Zipmex's attorneys, the firm's numerous entities have filed five motions for moratoriums on legal actions.

Top Crypto Bankruptcy of 2021

2021 was a great year for crypto. Nothing seemed impossible to achieve. Compared to what we’ve seen in 2022, the biggest bankruptcy in 2021 isn’t even a drop in the ocean. But it’s still worth talking about.

1. Blockchain Global, November 2021

Blockchain Global (BGL) was the parent firm of the now-defunct Australian Crypto Exchange (ACX). BGL went bankrupt following the administration collapse with over $15 million (USD) in debt.

The business operates a crypto trading platform called ACX, which was being sued separately by a group of 94 investors after abruptly shutting down in February 2020. The case was taken to the Victoria Supreme Court, which issued a freeze order on 117.33 Bitcoin — worth about $7.1 million — owned by the exchange's two operators, BGL and ACX Tech.

The corporations were later forced to reveal the full breadth of their assets, both domestic and foreign. According to the Australian Financial Review, BGL had subsequently filed voluntary administration, owing $15 million to creditors.

Top 2 Crypto Bankruptcies of 2020

2020 is regarded as the year of mystery in the crypto industry, as two of the largest exchanges abruptly ceased operations. It stunned investors by failing to provide any explanation for the shutdown.

1. FCoin, February 2020

FCoin was a Singapore-based crypto exchange that shut down unexpectedly after failing to pay investors 13,000 BTC (roughly $125 Million). The exchange got off to a strong start, with peak trading volume exceeding that of Huobi, OKex, and Binance combined. It was the result of its innovative business model known as transaction mining.

FCoin's rapid growth was reversed in July 2018 when almost 10,000 BTC poured off of the platform, causing panic. Following the incident, the platform began to sputter and lose users. In February 2018, the exchange made a decision to burn 720 million of its native token to help boost its price.

And it worked for FCoin—but only for a few hours when the price of FT rose. Then, mysteriously, the entire exchange was shut down. It's been over two years since, with no relief for users.

2. ACX, February 2020

ACX was an Australian cryptocurrency exchange that abruptly shut down, stealing around 10 million in user funds. The firm was boasted as Australia's most liquid bitcoin exchange.

However, the exchange unexpectedly ceased operations in January 2020, raising doubt on its solvency following the discovery of its empty hot wallet. Later, users found out the exchange's Australian offices were shut down.

Furthermore, emails and phone calls to the organization were unanswered for weeks. Even Blockchain Australia suspended ACX from its board, citing missing funds from exchange wallets. Users of the platform accused ACX of orchestrating an exit scam but still had some hope from ACX's parent company, Blockchain Global. All hopes were dashed when Blockchain Global collapsed in 2021.

Top Crypto Bankruptcy of 2019

The crypto community was taken aback in the year 2019 when two prominent crypto exchanges went bust, one for a completely mysterious reason.

1. Cryptopia, May 2019

Cryptopia was a New Zealand-based digital asset exchange that went bankrupt following a massive cyberattack. The exchange was undergoing unscheduled maintenance when it was suddenly attacked by hackers who stole more than $16 million from the exchange.

Data from Ethereum network suggested that funds were first drained from two of Cryptopia’s core wallets. Hackers then moved out funds from Cryptopia's 76,000+ secondary wallets. Despite numerous investigations, the reason for the hack remains unknown. Many people believe that Cryptopia actually pulled off an exit scam by positioning it as a security breach.

Others blamed the exchange for negligent storage practices, which resulted in hackers gaining unauthorized access. Cryptopia then finally launched the claims process to reimburse creditors. According to Grant Thornton's assessment statement of the firm's financial situation, the exchange owes a total of $4.2 million to its creditors.

Notable Crypto Bankruptcies Of All Time

There have been several notable crypto bankruptcies over the years. The most noteworthy was the Mt. Gox exchange, which went bankrupt in 2014 after succumbing to a major hack.

1. Mt. Gox, 2014

Mt. Gox was a Tokyo-based crypto exchange that declared bankruptcy in 2014 following a major hack. At its peak, the exchange handled more than 70% of all Bitcoin transactions worldwide.

Its popularity made it a target for hackers. In 2011, hackers exploited stolen credentials to transfer bitcoins to their own addresses. That same year, flaws in network protocol resulted in the loss of several thousand bitcoins.

Customers also voiced their displeasure around difficulty withdrawing payments in the months running up to early 2014. However, in February of the same year, the exchange suffered a fatal blow when it lost 850,000 bitcoins as a result of a major hack. The firm soon declared bankruptcy. Later, with the intervention from certain authorities, it was able to retrieve 200,000 BTC.

In November 2021, Mr. Kobayashi, the trustee for Mt. Gox, issued a rehabilitation strategy that included the registration and reimbursement process for various creditors. The procedure was later completed with the registration of some creditors. However, the vast majority of investor funds were unrecoverable.

2. Quadriga, 2019

Quadriga was a notable bankruptcy because it demonstrated the risks of having an exchange under the sole control of one person. The company’s late founder, Gerald Cotten, had the keys to the cold wallets holding customer funds and allegedly used the funds for personal trading and expenses. When he died, investigators were unable to trace the movement of customers’ money.

Ernst & Young, the professional services firm employed to dig into Quadriga after Cotten’s death, reported considerable lack of controls and oversight with the exchange.

It had no formal bank account or accounting system, and the entire setup appeared to be run from an encrypted laptop owned by Cotten. Besides, another co-founder was identified as someone previously convicted on identity theft charges in the US and deported to Canada who tried to hide their past with multiple name changes.

Quadriga users expected their funds to be safe similar to how it’d be in a bank but ended up disappointed. We think this is one of the most highlighted cases that drove the adoption of decentralized exchanges.

Final Thoughts On Crypto Bankruptcies

The crypto industry has witnessed several black swan events since its inception. While hacks and bear markets have been major causes, fraud and mismanagement have played an equal role.

The list of all crypto bankruptcies we covered – from the most recent Celcius fiasco to the most infamous Mt. Gox collapse – presents prime examples of what all can go wrong with even the most established projects in this space.

So, while a project may seem legit, there may always be some risks involved. To make sure you reduce your exposure to risk, always do your own research, look for exchanges that offer a proof of reserves, and learn from trusted sources like Milk Road before getting involved in any project.

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