How an exchange bankruptcy can wipe out your crypto portfolio

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Do you have crypto sitting in your account with a crypto exchange? It may not be as safe there as you think it is.

That comes as a surprise to you? No wonder, because until recently, exchanges weren’t required to highlight this type of risk. So let’s understand what is going on.

There are two ways to own crypto. Traditionally, you would have your own wallet, and manage the private keys to it directly. Without those, nobody can touch your holdings.

But those keys are a pain to deal with. They are impossible to memorize and easy to lose - and many fortunes have indeed been lost. That’s why many companies, such as exchanges said: Let’s just manage those for you. All you need is an account with us, and we save the private keys.

There is one big problem though: That means they are in possession of your crypto. In the case of an exchange going bankrupt, that has big consequences. Bankruptcy is a process meant to protect those, that a failing company owes money to. When it is initiated, all operations and funds are frozen, with the goal to repay debts.

But there is a pecking order - first, banks and other institutions will get money back… and you are at the very end of that list. By the time they get to you, your crypto will very likely have gone to satisfy a debt to someone much higher on the list. No more money for you.

There you have it - “not your keys, not your crypto” as they say. But the good news is that many exchanges offer wallets that you truly own, and money transfers are very easy. Check those out, you might thank us later!

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.