Insolvency in Crypto Exchanges - What is it and How Does it Affect You?

November 11, 2022
Knowledge Center » Blog » Insolvency in Crypto Exchanges - What is it and How Does it Affect You?

If you've been involved in the cryptocurrency world for any length of time, you've probably heard the term "insolvency" used in relation to exchanges. But what exactly is insolvency? In short, insolvency is when an exchange can no longer pay its debts. This can happen for a variety of reasons, but the most common cause is when an exchange doesn't have enough assets to cover its liabilities. When this happens, the exchange will usually be forced to file for bankruptcy.

The most famous example of an insolvent exchange is Mt. Gox. Mt. Gox was once the largest bitcoin exchange in the world, handling over 70% of all bitcoin transactions. However, in 2014, Mt. Gox suddenly halted all withdrawals, claiming that there was a "bug" in the software that allowed people to withdraw more bitcoins than they had deposited. It later turned out that this was not true; Mt. Gox had actually been insolvent for years and had been using customer deposits to cover their own losses. Eventually, Mt. Gox filed for bankruptcy, and customers who had stored their bitcoins on the exchange lost everything.

If you're thinking of storing your cryptocurrencies on an exchange, it's essential to understand the risks involved. While most exchanges are solvent and reliable, there is always a risk that an exchange could become insolvent and you could lose your funds. Here are a few things you can do to minimize this risk:

1) Only store the amount of cryptocurrency that you're willing to lose on an exchange. If you're only comfortable losing a small amount of money, then only store that amount on an exchange.
2) Keep your cryptocurrencies in a cold storage wallet rather than on an exchange. Cold storage wallets are offline wallets that are not connected to the internet; this makes them much more difficult to hack than online wallets (like those provided by exchanges).
3) Use multiple exchanges rather than just one. This way, if one exchange becomes insolvent, you won't lose all of your funds; you'll only lose the funds stored on that particular exchange.
4) Keep up with the news surrounding the exchanges you're using. If there are any red flags or warning signs, take your funds off the exchange and store them in a cold storage wallet until things settle down again.

Insolvency is a serious risk when storing cryptocurrencies on an exchange; however, there are steps you can take to minimize this risk. Always remember to only store the amount of cryptocurrency that you're willing to lose on an exchange, and keep your funds in a cold storage wallet whenever possible. Use multiple exchanges rather than just one, and stay up-to-date on all the latest news surrounding exchanges and cryptocurrency trading in general. By following these simple guidelines, you can help ensure that your crypto holdings are safe and secure as possible.

About Jacques Potts

Jacques Potts is Sr. Marketing Manager at Ledgible and an experienced financial author, marketer, and crypto expert. His work has been featured on The Street, Project Serum, FirstTrade, and Invstr.

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