The Key Takeaways
- In 2019, the number of crypto exchange failures jumped 252% and 17% respectively.
- 42% of the exchange failures were not explained to consumers. 9% were due fraud.
- Only 22% failed exchanges were due to business reasons
- However, market shakings can cause major turbulence and more exchanges could fail due to business reasons.
- This year, 55% of failed crypto-exchanges are expected to be shut down
The crypto exchanges market has been turbulent this year, with markets falling sharply as the Fed becomes hawkish about inflation concerns. Investors flee to safe haven cash as the geopolitical environment worsens.
Sometimes projects fail completely. This is the way of any start-up, and it’s especially true for an industry like crypto exchanges. To narrow the focus on centralised exchanges, it was interesting to see how many cryptocurrency exchanges have been shut down to date.
Failure of exchanges
After 23 exchanges went under in 2018, the number of these failures jumped by 252% in 2019, and then grew another 17% in 2020. The failure rate is now at 55%, which means that the remainder of the year will have a 50% decrease in failures.
Wait until you see why they went under…
Failure to exchange
However, the reasons are even more fascinating. Surprisingly, 42% failed exchanges disappeared without a trace. This is a staggering number of 134 exchanges and demonstrates how opaque the cryptocurrency market can be. CoinBene, a Singapore-based cryptocurrency exchange, is one of the most famous of these disappearing acts. Users received an unexpected announcement last November:
“Due to maintenance of CoinBene’s global server, we are unable to log into the www.coinbene.com Page. We are sorry for this “.
This shows how quickly these entities can turn pear-shaped and how far behind regulation is. This (former exchange) was also included in the report to SEC on fake volumes and exchanges.
Beyond disappearing without trace, 9 percent of failed exchanges turned out to be scams. Crex24, which occurred in February this year, was the latest example. Posts suddenly appeared about wallets being depleted of liquidity and tokens.
Another 5% of exchanges were also hacked. Only 22% of these failed for legitimate business reasons. Meanwhile, 8% of exchanges shut down due to regulation.
The chart above shows that centralised exchanges are gaining in longevity, which is to be expected as they mature. However, these numbers show that it is a necessity. It is essential that cryptocurrency be taken seriously and established fully if it wants to succeed.
Although cryptocurrency has been through bear markets in the past, this environment is very different. As the macro sentiment is worse than ever since the Great Financial Crash in 2008, this would be the first bear market that has occurred.
In the current context, I expect the 22% above for failed exchanges due business reasons to rise, which would be expected in an economic slowdown. This would also hinder the 55% decline in overall failures this year.
Concerning the amount that disappears into thin air, it is possible to expect it to be lower. Regulation is still far behind but should make it harder for exchanges to vanish in the future.
Scams follow the same logic. It will be interesting to see how many exchanges are closed due to regulatory changes. Regulators should encourage innovation and not suppress it. One hopes that if exchanges close due to changes in law, it is for a good reason.
However, as with all things in crypto, it’s difficult to predict with certainty if this turbulence turns into a long-term macro bear market. There is no precedent.