Why are so many Derivative Exchanges are filling for Bankcruptcy ?

[talkoncrypto Official]

Just came across a latest news that "Zipmex" is another exchange which have filed for Bankruptcy , after Voyager and others.. What do you think is the real reason for so many exchanges going down.

1) Could the reason be that they have inflated their trading volume , which is now they cannot sustain the real volume at time of dip

2) They lack liquidity

3) Exchanges have invested their liquidity somewhere else which is becoming hard to recover

4) Does it has to do anything with the global inflation that we might see in coming future

5) Do you think its good for the market where cheap players would be shutting down and people can have more robust platforms in future where they would be ready in situations like this.

6) Most Importantly its the people's money, will traders be able to cope up or have faith in trading crypto in future if they lose money like this??

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[EarnOnVictor]

Just came across a latest news that "Zipmex" is another exchange which have filed for Bankruptcy , after Voyager and others.. What do you think is the real reason for so many exchanges going down.

1) Could the reason be that they have inflated their trading volume , which is now they cannot sustain the real volume at time of dip

2) They lack liquidity

3) Exchanges have invested their liquidity somewhere else which is becoming hard to recover

4) Does it has to do anything with the global inflation that we might see in coming future

5) Do you think its good for the market where cheap players would be shutting down and people can have more robust platforms in future where they would be ready in situations like this.

6) Most Importantly its the people's money, will traders be able to cope up or have faith in trading crypto in future if they lose money like this??

In summary, any company could go bankrupt, including exchanges, and the reasons are many but do not mean that others in the same line of business are not doing well. This is why traders and investors should be careful and do thorough research before trusting any company with their money.

The reason for the bankruptcy might be due to unplanned business, mismanagement, more liabilities than they can cope with, harsh business environment, lack of funds and loans, and many other reasons. Yet, I don't think this should discourage traders and investors that mean business as they can always go for the best alternatives.

[tbct_mt2]

Bad capital management is cause of all bad things.

With bad capital management, any blackswan event will cause a collapse of that company financially. It can be a hack by bad security. It can be an attack like Terra Luna. It can be massive liquidation calls like Celcius, Three Arrows Capital, Voyager etc.

But if you have bad financial, capital management, your company is always at risk of bankruptcy.

In personal view, for your personal account, if you have bad management, you will be at risk of liquidation or lose all money with one failed or scam exit project.

[o_e_l_e_o]

What do you think is the real reason for so many exchanges going down.

These platforms make their profits by taking your coins which you deposit and lending them out to other entities, and charging interest on those loans, exactly the same as fiat banks do. What is different from fiat banks, is that there are absolutely no rules or regulations governing what loans they can make, and there is absolutely no insurance either. While the platforms all claimed that they did due diligence, only made safe loans, all the loans were covered in excess by collateral, and so on, it's now becoming clear that absolutely none of that was true, and these platforms loaned out your money to pretty much anyone who asked for it without checking their ability to repay the loan and with little to no collateral in return. When one big loanee collapsed (Three Arrows Capital), there was a massive knock on effect on a bunch of these lending platforms which left them all insolvent.

I've discussed all this at length in my thread here: Recent events should make you withdraw all your coins to your own wallet: Part 2

Most Importantly its the people's money, will traders be able to cope up or have faith in trading crypto in future if they lose money like this??

These ongoing collapse of multiple such platforms does not affect the fundamentals of bitcoin whatsoever. Hopefully, however, it will result in people losing faith in these centralized lending platforms and exchanges and instead choosing to keep their money in the only place it is actually safe - their own wallets.

[NotATether]

1) Could the reason be that they have inflated their trading volume , which is now they cannot sustain the real volume at time of dip

Nah, those have already went down long before recent events.

2) They lack liquidity

3) Exchanges have invested their liquidity somewhere else which is becoming hard to recover

The most likely reason (2 either implies 3, or 1 - and I already ruled out 1).

4) Does it has to do anything with the global inflation that we might see in coming future

Absolutely not. Nothing serious has even happened yet as far as inflation is concerned. It's mostly due to bad capital management which the other members have highlighted.

5) Do you think its good for the market where cheap players would be shutting down and people can have more robust platforms in future where they would be ready in situations like this.

History repeats itself, and nobody seems to learn a lesson from events like these, with rare exceptions such as Coinbase and Binance.

6) Most Importantly its the people's money, will traders be able to cope up or have faith in trading crypto in future if they lose money like this??

If they leave crypto because the wolves of wall street scammed them out of their money, that's their problem. At least the decentralized crypto communities are full of very reasonable people who'd think twice before handling a stranger's money.

[hugeblack]

You can't get a unified answer to all your questions, but the risk management of these platforms is the main cause of this mess, as they rely on hot money and more loans to get rapid growth, which means more hot money that will convince customers that things are good.

The reversal of the bitcoin price and the cessation of continuous growth is what made this hot money decrease and thus began the domino effect, which ended with these platforms declaring their bankruptcy.

The aggrieved party is the depositor, as he deposited his money into their hands in exchange for promises of profits, ignoring all the risks that might lead to him losing all his money if these platforms declared bankruptcy.

[Lucius]

I would answer in a simplified way, and the reason is that such companies are not even created to last too long, but for their owners to get rich and then use all possible loopholes in the law to get out of everything with as little personal damage as possible. The real problem is not that such companies exist, nor that they happen to go bankrupt, but the problem lies in all those who give them their trust (money) in the hope that they will profit from it.

Whoever was looking for an easy profit lost money in a fairly easy way, but it's not that there is anything that can surprise me considering that a lot of people believe (or have believed) that they can profit by investing in stablecoins - there are too many lunatics in the world

[DaveF]

Look back in time to the 2013-15 altcoin boom and bust. Many exchanges did not survive that.
Then look at the 2017 BTC boom and the 2018 fall. A bunch of exchanges failed then too.
Same thing going on now.
And guess what. Sooner or later there will be a massive BTC rally and a 'new shiny thing in crypto' and a bunch of new exchanges will pop up. And then when the cycle turns (hint it will that's why it's called a cycle) they will implode too.

-Dave

[Eternad]

Exchange has an operational cost that includes the salary of there worker and other fixed cost. Since there main source of income is trading fees, They are killed by it once they don't have enough profit to sustain this fixed expenses. And also they owns part of the liquidity of the exchange tokens, So they are hit hard on bear market because there assets stock on the tokens liquidity is dumping its value whic makes them bankrupt during bear market.

[logfiles]

It's funny that I have been trading derivatives for a while now and this is the first time I am hearing about zipmex. Looking at the name, it's one of those exchange you feel was inspired by BitMex to an extent that they had to even borrow part of the name. 
It doesn't give any confidence to use it, does it?

I read up some information from Reuters, and it seems the recent Celsius and Babel Finance turmoil affected them too

Singapore-based Zipmex resumed withdrawals last week, a day after suspending them on July 20, and said it was working to address its exposure of $53 million to crypto lenders Babel Finance and Celsius.

[OgNasty]

The simple explanation is that they gambled with other people's money and lost.  It's so easy for operations to massively profit when the price is rising, but things get more complicated once that gravy train stops.  It's like musical chairs and these are the exchanges that couldn't find a seat.  That's why the test of time is so important to Bitcoin projects.  If you're thinking about depositing money somewhere or investing in something, make sure it's survived a downcycle.  Anything in crypto that's been operating for less than 4 years should be considered a test.  Without seeing how it performs in the downturns, you really can't have an idea of how healthy a crypto organization is.

[o_e_l_e_o]

History repeats itself, and nobody seems to learn a lesson from events like these, with rare exceptions such as Coinbase and Binance.

I don't think Coinbase or Binance have learned any lessons either. Coinbase have obviously been through bear markets before, but still seemed to be caught so off guard by this one (that wasn't/isn't even that bad) that they had to fire 20% of their workforce. Imagine if the price dropped to $3k again like it did in 2018. I have a suspicion that Coinbase would be breaking out some fairly drastic measures to stay afloat if that were to happen.

I would answer in a simplified way, and the reason is that such companies are not even created to last too long, but for their owners to get rich and then use all possible loopholes in the law to get out of everything with as little personal damage as possible.

Case in point: As Celsius declares bankruptcy and all its users are likely to lose everything, reports say that the CEO Mashinsky sold around $45 million worth of his centralized CEL token he very kindly gave to himself. This is where customers' money has gone - straight in to his pocket.

[Lucius]

The simple explanation is that they gambled with other people's money and lost. 

The same thing that Gerald Cotten did with his clients' money in the case of his crypto exchange Quadriga, if the Canadian authorities' investigation is to be believed. It just shows how much people have misunderstood the basic concept of Bitcoin and treat it in the same way as fiat, and when situations like this happen, they blame everyone else but themselves.

Case in point: As Celsius declares bankruptcy and all its users are likely to lose everything, reports say that the CEO Mashinsky sold around $45 million worth of his centralized CEL token he very kindly gave to himself. This is where customers' money has gone - straight in to his pocket.

I haven't followed what's been happening with that company lately and this is new information to me, so I'm wondering if there is any criminal or misdemeanor liability here or if the CEO, as I said before, is using loopholes in the law to get out of the whole thing much richer than before. Generally speaking, events like this give a bad picture when it comes to Bitcoin, although of course it is not Bitcoin's fault that such companies exist or that people are naive to trust them.

I read an interesting article about him today, and what he promoted for years is obviously no longer valid - because the banks that he often mentioned in a negative context are now mentioned as potential saviors.

[o_e_l_e_o]

The same thing that Gerald Cotten did with his clients' money in the case of his crypto exchange Quadriga, if the Canadian authorities' investigation is to be believed.

Haven't heard that name in a few years. Did we every get to the bottom of it? Last I looked in to it (which, as mentioned, was several years ago) I was thoroughly unconvinced by the story that he had died. It looked far more likely that he had scammed all his customers, fled the country, faked his death, and was living the high life somewhere under a new identity. It seemed all this was planned in advance, so by the time the exchange collapsed and people started looking for him, he was already long gone.

I haven't followed what's been happening with that company lately and this is new information to me, so I'm wondering if there is any criminal or misdemeanor liability here or if the CEO, as I said before, is using loopholes in the law to get out of the whole thing much richer than before.

You can read the report here: https://www.arkhamintelligence.com/reports/celsius-report

It seemed he spread it out over time long before they declared bankruptcy, so little to none of it will be able to be examined or clawed back as part of the bankruptcy filings, although I'm sure he also took the necessary to steps to ensure his own holdings were entirely separate to those of Celsius for this exact reason. Doesn't matter to him though, it's only the average Joe who has lost any money, and we know that centralized exchanges don't care about those people at all.

[noorman0]

I think it's because they are tied to their own program return promise, "Staking". Perhaps what the user sees are programs that should be described in general articles about it, such as consensus contributions, network security, etc. But, who knew they were doing something else behind the scenes?  In fact lending platforms like Celsius can offer more returns for liquidity providers than normal staking rewards.

[talkoncrypto Official]

According to my opinion , Why is it that always at time of dip we see exchanges being shutting down and running away with people's money, These exchanges have found loop holes of bankruptcy where the company looses everything and owners become more rich ,  there is a chronology, which is followed by every exchange , that every exchange has their own token and their main purpose is to roll out their tokens to people in lieu of their funds, and peoples funds are been used somewhere else to make profits .. Somehow people also fall for their bait in terms of ROI . which is beyond imagination , take an example of Voyager, which such a pomp and show they promised returns upto 9% to lure people but at the end of the day people do not realize how can such calculations be possible at the time if market goes down...

[Mr. Magkaisa]

Just came across a latest news that "Zipmex" is another exchange which have filed for Bankruptcy , after Voyager and others.. What do you think is the real reason for so many exchanges going down.

1) Could the reason be that they have inflated their trading volume , which is now they cannot sustain the real volume at time of dip

2) They lack liquidity

3) Exchanges have invested their liquidity somewhere else which is becoming hard to recover

4) Does it has to do anything with the global inflation that we might see in coming future

5) Do you think its good for the market where cheap players would be shutting down and people can have more robust platforms in future where they would be ready in situations like this.

6) Most Importantly its the people's money, will traders be able to cope up or have faith in trading crypto in future if they lose money like this??

Maybe one of the reasons for the closure of an exchange in the cryptocurrency business is the lack of proper supervision in this type of business. Second, if an owner of an exchange only wants to accumulate a large amount of funds, it will actually cause the company to collapse. And they may not be able to get their main goal to stay in this industry, so what happens is that the event is always offset. Which causes their client traders to withdraw from using their platform.

[stompix]

I read an interesting article about him today, and what he promoted for years is obviously no longer valid - because the banks that he often mentioned in a negative context are now mentioned as potential saviors.

Excellent article, and it shows the situation perfectly right now, all these saviors are just using the community and its funds to get rich.

Laser eyes, fuck the banks, fuck the government, they keep shouting these as they know the userbase is susceptible to this message, and if somebody dares contradicts them there is the mass destruction weapon of the cultist, the FUD!!!!! Dare to say anything about an exchange, a token and you're going to labeled as a FUD-ist, a horde of 5$ investors who think their pennies will turn into millions by hitting like and kissing the ass of some cryptopornstar will start crying FUD, will swear everything is fine, that moon is scheduled tomorrow.

And these pieces of * like Mashinsky know that you just have to throw a few useless tokens at them and you have an army of online supporters ready to ridicule any attempt at showing the truth.

Just as the other moron tattooed a useless token on his arm, I wonder what story is behind that shirt, I have a feeling right now that the majority or at least a large chunk of the money he made selling his tokens is sitting right now in a bank, not in a Defi solution that would magically replace banks.

The same thing that Gerald Cotten did with his clients' money in the case of his crypto exchange Quadriga, if the Canadian authorities' investigation is to be believed.

Haven't heard that name in a few years. Did we every get to the bottom of it? Last I looked in to it (which, as mentioned, was several years ago) I was thoroughly unconvinced by the story that he had died. It looked far more likely that he had scammed all his customers, fled the country, faked his death, and was living the high life somewhere under a new identity. It seemed all this was planned in advance, so by the time the exchange collapsed and people started looking for him, he was already long gone.

One thing has surfaced since then, that Quadridrga has financed itself on customers' money, and lost a lot of them during the time of actually operating, so the claimed 130 million have never been actually there, much of it being spent in the year before Cotten's supposed or real death. They've managed to get ahold of real estate investments of 20 million, so it's highly likely he sold or used his customer's funds well beyond that date to purchase stuff for himself and then run the business as a Ponzi.

So, basically, the exchange was already bankrupt with almost nothing left some 8 months prior to his again...death?

[Lucius]

Haven't heard that name in a few years. Did we every get to the bottom of it? Last I looked in to it (which, as mentioned, was several years ago) I was thoroughly unconvinced by the story that he had died. It looked far more likely that he had scammed all his customers, fled the country, faked his death, and was living the high life somewhere under a new identity. It seemed all this was planned in advance, so by the time the exchange collapsed and people started looking for him, he was already long gone.

I was skeptical about the documentary that was talked about on the forum, but after watching it some things became clearer to me, although no one can say for sure that Cotten is dead because the only ones who allegedly saw the body are his wife and a doctor in India who pronounced him dead. Even with all the evidence about how he ran his exchange office, there is a justified suspicion that he is alive somewhere and enjoying the few million dollars that he managed to hide from the authorities and the public.

It seemed he spread it out over time long before they declared bankruptcy, so little to none of it will be able to be examined or clawed back as part of the bankruptcy filings, although I'm sure he also took the necessary to steps to ensure his own holdings were entirely separate to those of Celsius for this exact reason. Doesn't matter to him though, it's only the average Joe who has lost any money, and we know that centralized exchanges don't care about those people at all.

As stated in several places in the article, it seems that this company ran into problems long before the final collapse, but it was successfully hidden. I remember some discussions when things were still in their infancy and I never liked the idea of cryptocurrencies being used in such a way, especially when the whole business model was in some kind of gray zone. In an ideal world, that CEO and everyone who participated in everything would be convicted and sent to prison, and their assets would be seized and sold to settle their clients.

Excellent article, and it shows the situation perfectly right now, all these saviors are just using the community and its funds to get rich.

It's a real rarity today to read something that isn't mere sensationalism and clickbait, but there are obviously still some journalists who know their job.

Laser eyes, fuck the banks, fuck the government, they keep shouting these as they know the userbase is susceptible to this message, and if somebody dares contradicts them there is the mass destruction weapon of the cultist, the FUD!!!!! Dare to say anything about an exchange, a token and you're going to labeled as a FUD-ist, a horde of 5$ investors who think their pennies will turn into millions by hitting like and kissing the ass of some cryptopornstar will start crying FUD, will swear everything is fine, that moon is scheduled tomorrow.

Most of them say what people want to hear, but they are actually doing something completely different in the background, and that is nothing that should surprise us. That's why I'm always careful about people who try to position themselves as some kind of crypto leaders, and at the same time use Bitcoin as a story through which they sell their product (token). Every day I wonder if people will finally understand that they shouldn't be so naive and believe that someone is pro-Bitcoin just because he invested in Bitcoin, or has a company that trades with Bitcoin.

So, basically, the exchange was already bankrupt with almost nothing left some 8 months prior to his again...death?

On the link I posted above in the post, you can see the report of the Canadian authorities, which summarizes what they concluded from their investigation. However, it seems quite unreal to me that a man managed to gamble away more than $160 million through various investments, as if he was a total anti-talent for such things, and everything that was revealed in the documentary clearly shows that he was a very insidious scammer from his earliest days.

[avikz]

There could be n number of reasons for a company to go bankrupt. Derivative exchanges are even more prone to such things because they make money out of thin air without holding the actual asset. They allow their traders to bet on price differences that are going to occur in future. So it is a high risk business.

There are other kind of crypto business goong bankrupt as well. I have seen Celcius has also filed for bankruptcy. They gambled for bullish bitcoin but failed to protect the business during a bearish time. So poor fund management is another reason for such bankruptcy cases.