[ELI5] How do crypto exchanges go bankrupt?


If these platforms operates by charging service fees for users to buy and sell cryptocurrencies, it sounds like a fail safe business model.

How can they actually incur debt and go bankrupt?

In: 3

Also, wasn’t their big selling point that if the market crashed, crypto would stand strong?

You’re correct it’s fool proof unless:

– They hold a stake in some crypto/realted assets, particularly if it’s margined (i.e. they borrowed money to buy it)

– Let customers trade on borrowed money, which the customer then defaults on and the exchange is left holding the bag

– have high expenses (staffing) that were only covered when crypto trading volumes were high, and now people don’t want to trade crypto as much so your revenue disappears

Some of these businesses have suffered large-scale thefts or have lost huge amounts of money to software bugs. In some cases it’s possible that these were inside jobs, i.e. the bankruptcy was part of their strategy for making money all along.

But the big problem at the moment seems to be that some of the main exchanges heavily invested in cryptocurrency themselves, in order to drive up prices and excitement and bring in more business. Now that cryptocurrency prices are falling, they are making big losses on those investments.

> it sounds like a fail safe business model.

There is no such thing as a fail safe business model. What if competition forces them to reduce their fees to the point where their revenue no longer covers their expenses? What if regulations are introduced that require them to drastically change their business? What if their offices and servers are destroyed by a volcano?