Level 4: Risk & Safety
Exchange Failures
Why 'Not your keys, not your coins' is critical advice.
6 min read
Not Your Keys, Not Your Coins
A fundamental crypto principle: if you don't control the private keys, you don't truly own the cryptocurrency. Funds on an exchange are held by that company — you're trusting them not to lose, steal, or freeze your assets.
The Risk is Real
Even the largest, most "trusted" exchanges have failed. FTX was the 2nd largest exchange in the world before collapsing overnight, leaving customers unable to withdraw billions in funds.
Major Exchange Failures
FTX (2022)
1+ million users affected$8+ billion
customer funds lost
Cause: Fraud - customer funds secretly used for trading and loans
Mt. Gox (2014)
24,000+ users affected850,000 BTC (~$450M then)
customer funds lost
Cause: Hack - security vulnerabilities exploited over years
Celsius (2022)
300,000+ users affected$4.7 billion
customer funds lost
Cause: Insolvency - risky investments with customer deposits
QuadrigaCX (2019)
115,000 users affected$190 million
customer funds lost
Cause: Fraud - CEO death revealed funds were missing
How Exchanges Can Fail
Hacks
Exchanges are prime targets holding billions in crypto. Even major exchanges have been hacked multiple times.
Fraud
Owners may secretly misuse customer funds for trading, loans, or personal use (as FTX did).
Insolvency
Poor business decisions or market downturns can leave exchanges unable to cover withdrawals.
Regulatory Action
Government actions can freeze assets or shut down exchanges, leaving users unable to access funds.
Warning Signs
- Withdrawal delays or "maintenance" periods
- Unusual withdrawal limits being imposed
- Executives leaving the company
- Negative news about financial health
- Lack of proof of reserves
- Operating from jurisdictions with weak regulation
How to Protect Yourself
1
Don't keep large amounts on exchanges
Only keep what you're actively trading
2
Use self-custody wallets
Hardware wallets for significant holdings
3
Choose regulated exchanges
Prefer exchanges with licenses in major jurisdictions
4
Diversify across platforms
Don't put all funds on one exchange
What Beginners Should Remember
- Exchanges are convenient but carry significant counterparty risk
- "Too big to fail" doesn't exist in crypto — FTX proved that
- Learn to use a hardware wallet for long-term storage
- Withdraw to self-custody regularly, don't let funds accumulate