Over a million people learned the hard way in November 2022 when FTX collapsed. One day, it was the world’s third-largest crypto exchange. Three days later, bankruptcy hit, $8 billion was missing, and Sam Bankman-Fried ended up in handcuffs. If you had $50,000 on there, as many did, your money was suddenly locked up, possibly gone for good.
The tough truth? Crypto exchanges come with no FDIC insurance, no government bailout, and no real safety net. You’re just another creditor in a massive line, fighting for pennies on the dollar.
I’ll break down exactly what happens step by step, no tech jargon, just the facts.
How FTX Went From Hero to Zero in 72 Hours
FTX looked bulletproof back in 2022. They had celebrity endorsements. Tom Brady was their spokesperson. They bought the naming rights to the Miami Heat stadium. Sam Bankman-Fried appeared on magazine covers wearing cargo shorts and preaching about effective altruism.
Then, on November 2nd, CoinDesk dropped a bombshell report. Turns out Alameda Research (that’s Bankman-Fried’s trading firm) was sitting on mountains of FTT tokens. These tokens were literally created by FTX itself.
Think about that for a second. Your trading company’s biggest asset is a made-up token that your other company printed. That’s like building your retirement fund entirely out of Monopoly money you printed in your basement.
Binance CEO Changpeng Zhao read that article and immediately decided to dump his FTT holdings. Other investors panicked. Within hours, everyone wanted their money back at the same time. Classic bank run.
FTX customers tried pulling out $6 billion in three days. The exchange couldn’t pay. On November 8th, they froze all withdrawals. By November 11th, bankruptcy papers were filed with the SEC.
The final tally? An $8 billion black hole where customer money used to be. Bankman-Fried had been secretly funneling customer deposits to Alameda Research to cover trading losses. When those bets went south, customer funds evaporated.
A court handed him 25 years in prison. Many traders are still waiting to see if they’ll ever recover their money.
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Your Account Gets Frozen Without Warning
Let’s talk about what happens the second an exchange realizes they’re in trouble. Your account gets frozen solid. No withdrawals. No trading. You can log in and stare at numbers on a screen, but that’s it. Those numbers might as well be written in invisible ink.
Celsius Network froze customer accounts on June 12, 2022. Voyager Digital locked everything down on July 1st. BlockFi followed in November. Thousands watched helplessly as their college funds, house down payments, and retirement savings turned into digital hostages.
Why does freezing happen so fast? Something called a liquidity crisis. Every single customer wants their money at once. The exchange doesn’t have enough liquid assets to pay everyone. So they lock the doors.
You’ll get an email saying something vague like “temporary pause on withdrawals for the security and safety of our community.” Translation: we’re broke and scrambling. That pause? It usually becomes permanent. Next stop is bankruptcy court.
Bankruptcy Court Takes Control of Everything
Once an exchange files for bankruptcy (Chapter 11 in the US), lawyers take over. A bankruptcy trustee gets appointed. They seize control of whatever scraps are left in the company’s accounts.
FTX brought in John J. Ray III as their new CEO after the collapse. This guy had previously handled the Enron bankruptcy, one of the biggest corporate frauds in American history. Even he was shocked. He called FTX’s financial record-keeping the worst he’d ever witnessed in his entire career. No separation between customer money and company funds. No proper accounting. Just complete chaos.
Bankruptcy proceedings drag on for years. Mt. Gox collapsed back in 2014. Some creditors waited nearly a decade for any repayment. A few still haven’t been fully compensated.
During bankruptcy, the court figures out who gets paid and in what order. Unfortunately for regular users like you and me, we’re usually dead last in line.
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Who Gets Paid First? (Spoiler: Not You)
Bankruptcy law has a brutal pecking order. Secured creditors come first. These are big institutional investors who negotiated special protections when they invested millions into the exchange.
Next in line come employees owed wages and government tax claims. Then, finally, after everyone else gets fed, come unsecured creditors. That’s where regular users sit.
If anything’s left after secured creditors take their cut (big if), unsecured creditors split the remaining crumbs. You might get 10 cents for every dollar you lost. You might get nothing.
Here’s the part that really stings. Your claim gets valued at the dollar amount on the bankruptcy filing date. Let’s say you had one Bitcoin worth $20,000 when the exchange collapsed. Bitcoin later shoots up to $60,000. Too bad. Your claim stays frozen at $20,000.
FTX announced in May 2024 that most customers would eventually get repaid. But only because crypto prices bounced back hard and the bankruptcy team sold off other assets. Plenty of users still lost out on years of potential gains while their money sat locked up.
There’s Zero Government Insurance for Crypto
Traditional banks have deposit insurance. In America, the FDIC protects up to $250,000 per person. Most developed countries have similar programs. If your bank fails, the government steps in and makes you whole.
Crypto exchanges? Absolutely zero protection.
Some exchanges lied about having insurance. Voyager told customers their US dollar deposits sat in FDIC-insured accounts. That was misleading nonsense. The FDIC only covers actual bank failures, not exchange collapses. The bank holding Voyager’s money confirmed customers weren’t covered.
A few exchanges carry limited private insurance against hacks or theft. But that insurance almost never covers bankruptcy. If the company implodes due to fraud or mismanagement, you’re out of luck.
This makes crypto fundamentally different from traditional banking. The safety nets simply don’t exist yet. You’re flying without a parachute.
Also Read: Decentralized vs. Centralized Exchanges: Pros & Cons in 2025
One Failure Triggers More Failures
Crypto companies are tangled together like Christmas lights. When one big player goes down, it yanks others down with it.
Three Arrows Capital (a major crypto hedge fund) blew up in 2022. That killed Voyager and Celsius because they’d loaned massive amounts of money to Three Arrows. When FTX collapsed, it dragged down BlockFi too. BlockFi had $355 million stuck on the FTX platform when withdrawals froze.
Genesis Global Capital filed for bankruptcy in January 2023. The company had exposure to both FTX and Three Arrows. Final damage was over $3.4 billion owed to creditors.
This interconnectedness creates what economists call systemic risk. One domino falls and knocks down the whole row. Your exchange might look financially healthy on paper. But if they loaned customer money to a failing company, your funds are suddenly at risk.
Warning Signs That an Exchange Might Be in Trouble
Looking back at FTX, Celsius, and other disasters, you can spot patterns. Here are red flags that should make you nervous:
Withdrawal delays
If it suddenly takes days or weeks to pull your money out, something’s wrong. Healthy exchanges process withdrawals within hours.
Surprise terms of service changes
Watch for sudden policy updates about withdrawal limits or fund access. Companies rewrite rules when they’re desperate.
Yields that seem too good to be true
Celsius offered up to 30% annual returns. That’s completely unsustainable. High yields always mean high risk.
Zero transparency
Legitimate exchanges publish proof of reserves and undergo audits. If an exchange won’t share basic financial information, run away.
Mixing customer funds with company money
FTX used customer deposits for Alameda’s trading. That’s financial fraud. Customer funds should always be segregated in separate accounts.
Executive departures
When executives suddenly quit or the company faces regulatory investigations, trouble is brewing fast.
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How to Actually Protect Your Crypto
You can’t eliminate risk completely. But you can slash it dramatically with some common sense moves.
Take Control of Your Own Keys
The crypto world has a saying worth memorizing: “Not your keys, not your coins.” If an exchange holds your private keys, they control your crypto. You’re trusting them to give it back when you ask nicely.
Self-custody means transferring your crypto to a wallet where you control the private keys. Hardware wallets like Ledger or Trezor keep your keys completely offline and away from hackers. Software wallets like MetaMask or Exodus offer more convenience with decent security.
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The FTX collapse scared thousands of people into self-custody. It’s slightly more technical. You’re responsible for not losing your seed phrase. But you completely eliminate the risk of an exchange stealing or losing your money.
Never Store Large Amounts on Any Exchange
Only keep on an exchange what you plan to trade in the near future. Everything else should live in your own wallet.
Think of exchanges like carrying cash in your pocket. You wouldn’t walk around with your life savings in your wallet. Same logic applies here.
Spread Your Crypto Across Multiple Platforms
Don’t put everything on one exchange. Use multiple platforms. If one fails, you haven’t lost your entire portfolio.
Choose exchanges with strong reputations and regulatory compliance. Coinbase operates as a public company with audited financials and maintains proper separation of customer assets. Kraken has operated for over a decade without major incidents. Binance is the world’s largest exchange with robust security.
Look for exchanges that:
- Publish regular proof of reserves
- Undergo third-party security audits
- Operate in well-regulated jurisdictions
- Have clean track records with no major hacks
- Maintain clear separation between customer and company funds
Check If Exchanges Prove Their Reserves
Some exchanges now publish proof of reserves. This cryptographic verification shows they actually hold the crypto they claim to have. Binance, Kraken, and others offer this transparency.
It’s not perfect. Exchanges can still hide liabilities or debts. But it’s better than flying blind. An exchange that won’t prove it holds your assets probably doesn’t.
Stay Informed About New Regulations
Regulatory frameworks keep evolving. The SEC, CFTC, and other agencies are developing rules for crypto custody and exchange operations.
Following regulatory news helps you understand which exchanges operate legally and which cut corners. Regulated exchanges face stricter requirements for segregating customer funds and publishing financial reports.
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What to Do If Your Exchange Collapses
Let’s say disaster strikes. Your exchange announces bankruptcy. Here’s your action plan:
Document everything immediately
Take screenshots of your account balances, transaction history, deposit records, and any emails from the exchange. Courts need hard proof of what you owned.
File a claim on time
Bankruptcy courts require creditors to file claims within specific deadlines. Miss that deadline and you lose your right to any recovery. Watch for official notices about the claims process.
Join forces with other victims
Other users usually organize creditor groups. Class action lawsuits and creditor committees give individual users way more leverage than going solo.
Get legal help for large amounts
If you lost significant money, hire a bankruptcy attorney. They understand the Byzantine process and can fight to protect your interests.
Practice patience
Recovery takes years, not months. Don’t fall for scams promising quick repayment for an upfront fee. Legitimate bankruptcy proceedings crawl at a snail’s pace.
Report to authorities
File complaints with relevant regulators. In the US, that includes the SEC’s enforcement division, the CFTC, and FBI. Other countries have similar agencies.
How the Industry Is Changing After FTX
The 2022 wave of exchange failures permanently changed crypto. The industry is slowly adapting.
Regulators worldwide are proposing stricter rules. The European Union’s MiCA regulation requires exchanges to segregate customer funds and maintain adequate reserves. Other regions are following suit.
Exchanges are improving custody practices. More platforms are adopting bank-grade security measures and submitting to independent audits.
Decentralized exchanges are gaining serious traction. Platforms like Uniswap let you trade without ever surrendering custody of your assets. You maintain full control throughout every transaction.
The underlying technology keeps improving too. Multi-signature wallets and secure multi-party computation split custody responsibility across multiple parties, reducing single points of failure.
The Brutal Lessons From FTX
The FTX collapse taught the crypto world some expensive lessons that cost people billions:
Celebrity endorsements and flashy marketing mean absolutely nothing. FTX had Tom Brady on TV commercials. They still went bankrupt.
Regulation actually matters. The complete lack of oversight enabled Bankman-Fried to misuse customer funds for years without getting caught.
Transparency is non-negotiable. FTX operated like a black box until everything exploded. Exchanges that won’t show their financial records are hiding something.
Chasing high yields is dangerous gambling. Lending platforms promising double-digit returns often hide massive risks underneath.
Self-custody has downsides, but it eliminates counterparty risk entirely. You might accidentally lose your own keys. But at least you won’t lose your funds to someone else’s fraud.
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What happens to my crypto if an exchange goes bankrupt?
Your crypto gets frozen the moment bankruptcy is announced. You’ll need to file a claim in bankruptcy court proving what you owned. The recovery process typically takes several years. You might recover a fraction of your original holdings valued at bankruptcy filing prices, or you might get nothing if secured creditors take everything first.
Is there any insurance protecting crypto on exchanges?
No government insurance exists for crypto exchange failures. Traditional bank deposit insurance doesn’t cover crypto. Some exchanges offer limited private insurance against hacks, but this rarely covers bankruptcy or fraud situations. You’re essentially unprotected.
Should I keep my crypto on an exchange or move it to my own wallet?
Keep only what you’re actively trading on exchanges. Move everything else to a self-custody wallet where you control the private keys. This eliminates counterparty risk entirely, though it means you’re responsible for securing your own seed phrase.
How can I tell if my exchange is about to fail?
Watch for withdrawal delays, sudden changes to terms of service, lack of financial transparency, unsustainably high yield promises, and executive resignations. These red flags often signal underlying financial problems that could lead to collapse.
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Disclaimer:
Look, we’re just journalists reporting the news here, not your financial advisors. Everything you read above is for information purposes only. Crypto is wild, unpredictable, and can absolutely wreck your savings if you’re not careful. Never invest money you can’t afford to lose. Seriously, we mean it. Do your own research, talk to actual licensed financial professionals, and remember that past performance means absolutely nothing when it comes to future results. The crypto market can turn on a dime, and what’s hot today might be toast tomorrow. We’re not responsible for your investment decisions, good or bad. Trade smart, stay safe, and don’t bet the farm on anything you read on the internet, including this article.
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