What Happens If a Crypto Exchange Shuts Down? : A Simple Guide for Crypto Users

More and more people investing in crypto have, over time, given rise to several cryptocurrency exchanges to help ease the trading process. However, with the innovation comes some risk attached. And among the concerns, the question “what happens to the assets if a crypto exchange shuts down” rises above all. 

In this article, we will explain the situations of crypto exchanges shutting down and what you can do to protect your assets. 

What is a Crypto Exchange Shutdown?

Crypto trading platforms are shut down for various reasons, including bankruptcy, unforeseen events, or voluntary closure. Since the very beginning of crypto trading, according to Cryptowisser, around 75 exchanges have been closed in 2020 alone. Coinjournal has reported over 23 exchange shutdowns in 2018. 

A crypto exchange going bankrupt or shutting down due to a violation of local regulations is one of the most concerning risks of centralized platforms for crypto trading. Due to the decentralized nature of the crypto market, there is no guarantee that you’ll ever get your money back once the exchange closes.

Among the most common causes of exchange failures is bankruptcy, which results from mismanagement, contagion effect, or breaches in security. Some exchanges, due to unfavorable market conditions, may decide to shut down voluntarily. In some rare cases, like the Canadian exchange QuadrigaCX, it had to wind things down with the sudden passing of its CEO, who was the only person with access to the exchange’s private keys.

The exchange can also close due to hacking, as in the case of the Mt.Gox exchange, which filed for bankruptcy in 2014. Around 850,000 bitcoin, totalling to 4% of the total 21 million supply, went missing from the exchange. 

What Happens to Your Bitcoin When the Exchange Fails?

What happens to your crypto coins will depend on the circumstances under which the exchange decides to shut down. From complete, permanent loss of the cryptocurrencies to minor failures that may or may not be covered by the insurance policy. Even if you were able to recover your funds, you’ll have to wait for a long time. 

The worst possible outcome of an exchange closing down is that your cryptocurrencies are lost forever. This happens because Bitcoin is not protected or subject to traditional financial regulations and consumer protections. Whatever the reason, be it poor business management or hacking, the exchange becomes insolvent and incapable of meeting its commitments. 

A slightly hopeful situation is when you might get a partial reimbursement at some point in the future. During the proceedings of bankruptcy, officials liquidate the accounts and decide how to reimburse unsecured creditors. 

Many of the larger exchanges offer some kind of insurance to cover their own custody of funds for you, but the catch is that you may not be listed as the beneficiary. This only covers very specific cases where your funds would be returned. In most cases, closure due to cybersecurity breaches or internal theft can take time to pay out. 

The problem with having your coins at centralized crypto exchanges is that you don’t essentially own the coins. If the coins are not held in your wallet, you are not the primary owner of the Bitcoins you have. Though exchanges make the investment process easier, they are not a safe place to hold your funds. 

How to Protect Your Digital Assets from Exchange Failures

While risks related to exchange failure are concerning, there are some proactive measures you can deploy to protect your digital assets.

• Using cold wallets or hardware wallets with control over private keys vested in you is the safest method to reduce the exchange-related risks. 
• Diversifying your holdings by spreading your assets over different platforms, with several wallets or exchangers, lets you play safe. 
• Choosing reputable exchanges with insurance, a license, and frequent audits provides an extra security. 
• Review the terms of service carefully before investing with an exchange, as this can tell how your assets will be handled in unfavorable circumstances. 
• Keep a constant check on the financial stability of the exchanges you use, and take cues from abrupt modifications in the withdrawal guidelines, difficulties in technology, or media coverage related to insolvency. 

Final Thoughts

The realm of crypto is unpredictable, and if you are unlucky enough, the trading platforms can close down overnight. In the worst cases, you might lose all your assets. However, to mitigate such instances, use self-custody wallets, DEXs, and stay vigilant of the market situations. In the fast-changing world of cryptocurrency, staying diligent is highly essential and not an option.