When we think about cryptocurrency, it's easy to get carried away with the significant financial gains in the industry. While these financial gains are without dispute, the crypto market is still very volatile, and there is always a risk of loss. The risk becomes even more damaging and difficult for crypto companies with numerous holders and stakeholders. Significant losses prompt many of these businesses to file for bankruptcy, and that's always the news that every crypto investor wants to avoid as much as they can.
Bankruptcy Is Not New to The Crypto Industry
The truth that must be said is that bankruptcy is a bane of any business in every sector. It usually comes with a turbulent financial crisis that is then followed by a series of events which affects all and sundry. A crypto company can file for either chapter 11 or chapter 13 bankruptcy if it cannot fulfill its obligations to its investors and seeks to find a way to reorganize. These bankruptcies often leave some investors unable to withdraw as these are the risks for crypto holders and investors, particularly with exchange or lending platforms.
This crypto market has been around for about 14 years, and in that time, it has grown into a $1 trillion industry, but this doesn't come without its risks. Unlike a bank, where the Federal Deposit Insurance Corp. (FDIC) insures your deposits when it fails, cryptocurrency holdings are not insured. What this means is that a large part of the responsibility of the company to cover losses depends on its established chain of which its investors get paid. This invariably long process makes crypto bankruptcies a pain we all wish to avoid.
What better way to avoid a potential problem than to know more about it? This is why we will be taking a closer look at the history of some bankrupt companies in the crypto industry. A rundown of 5 significant bankruptcies in the crypto market will give a clear picture of what bankruptcy looks like in the crypto industry. Knowing this history will help you significantly assess your crypto company properly and read signs pointing to potential problems.
What Are the Top 5 Biggest Crypto Bankruptcies?
1. Mt. Gox, 2014
There are few industries as threatened by cybercrime like crypto and no example shows this more than Mt. Fox's fall in 2014. All it took was a major hack in 2014, and the company suffered a fatal blow which it never recovered from. Before this incident, the firm stood tall as one of the most popular crypto companies handling over 70% of all Bitcoin transactions in the market.
Mt. Gox had initially suffered significant losses thanks to attacks in 2011 after some credentials were stolen and used by hackers to transfer bitcoins to their wallets. Likewise in the same year, thousands of bitcoins were also stolen thanks to flaws in the firm’s network protocol. This set the tone for the grandest attack in 2014 when the company lost 850,000 bitcoins after a serious cyber attack. This would prove to be the last straw, as the company declared bankruptcy shortly after.
Mt. Gox recovered 200,000 BTC after certain authorities intervened. To further compensate, the company came up with a reimbursement protocol for some investors in November 2021. Most of the investors, however, were unable to recover their funds.
2. Quadriga, 2019
In 2019, the Canadian cryptocurrency exchange QuadrigaCX declared bankruptcy after its founder and CEO, Gerald Cotten, died unexpectedly in December 2018. He passed away in India due to complications from Crohn’s Disease. Being the only person with access to the exchange’s cold wallets — holding the majority of Quadriga’s crypto assets — which became inaccessible, the exchange couldn’t repay its customers.
However, QuadrigaCX had been facing financial issues prior to Cotten’s death. The inability to access the wallets led to the declaration of bankruptcy on February 5, 2019. At the time of bankruptcy, QuadrigaCX owed its customers almost $190 million in both fiat and cryptocurrency. Immediately after the bankruptcy was declared, the exchange froze all customer accounts, making them lose access to their funds.
The QuadrigaCX bankruptcy created a great deal of controversy in the crypto space. Many customers were angry that the exchange had not done more to protect their funds and were demanding answers.
3. FTX, 2022
The 2022 crypto bear industry brought a lot of problems to crypto companies, but none was more severe than FTX. The company stood tall in terms of trading volume as one of the 5 biggest exchange platforms for crypto. Unfortunately, it would later become liquidated leaving it with no choice but to file for bankruptcy in the eleventh month of 2022.
FTX’s capitulation started when a report broke on issues with Alameda Research which is a trading firm with which it had close ties. The news further stated that Alameda had a debt profile that summed up to $8 billion along with its equity in FTT. Following the news report, Binance sold off its assets in FTT which took the token's value on a downward spiral.
Investors also followed suit and sought to withdraw $6 billion within the next three days which only worsened the situation. Ultimately, the company couldn’t execute the withdrawals and had to file for bankruptcy in the U.S. At this point, the company owed a deficit of $9 billion according to bankruptcy filings with over a million creditors left hanging.
FTX ran into problems because it was investing in risky trading bets using customer funds through Alameda Research. Many of these risks eventually fell through along with some illiquid investments that put the company in an impossible position when trouble hit. The company, however, looked set to be salvaged by Binance after there was agreement in principle for acquisition in November. Unfortunately, Binance had to pull out of the deal after it performed due diligence.
4. Three Arrows Capital, 2022
With about $10 billion in assets, Three Arrows Capital (3AC) was riding high as one of the biggest crypto hedge funds around early 2022. A liquidity crisis brought about by the turbulent bear market in 2022 left the firm with no choice but to file for bankruptcy in July of the same year. A total debt of $3.5 billion was reported for 3AC after it filed for bankruptcy with a couple of other crypto companies suffering huge losses alongside.
The direct factor to be linked to the sinking of 3AC is the collapse of UST, a very popular stablecoin at that time. The project would eventually collapse to zero, and along with it, the $500 million 3AC had invested. Likewise, the firm also lost significantly when bitcoin and Ethereum prices crashed. The firm eventually filed for bankruptcy, leaving top crypto companies like Blochchain.com, Genesis, and Voyager Digital suffering from the fallout.
5. Genesis, 2023
The firm used to be one of the top crypto lenders in the crypto industry. The effect of a tough 2022 persisted into 2023 as it declared itself bankrupt in January. Genesis is a subsidiary of Digital Currency Group, and its bad turnover in 2022 meant that it began 2023 by declaring itself bankrupt and issuing a bankruptcy plan immediately.
The firm suffered thanks hugely to a loan loss at the hands of 3AC, who had already gone bankrupt in July 2022. Its fortunes were further dampened when FTX went down along with Alameda Research, with whom Genesis had dealings. The collapse of FTX resulted in a loss of over $175 million of Genesis' assets, which left the company unable to cater for customers' requests for redemptions.
However, the platform is still operating, and with its detailed bankruptcy plan, investors are hopeful of recovering some of their funds even if they cannot recover all.
Final Thoughts
From these examples, it's easy to see that crypto companies are not immune to risks and threats that oppose traditional businesses. While it will take a lot for crypto companies to file for bankruptcy and leave investors in a dilemma, it's very doable. This is why it's advisable to keep yourself in the know on the latest happenings in the crypto world at all times.
It could help you in protecting your investment the next time a crypto company is to suffer significantly. You can keep up to date with the latest news in the crypto world - HERE.
