which crypto exchanges will go under

This year has been a hard one for the crypto ecosystem as changes in macroeconomic conditions across the world have led to a sharp risk-off move in the markets that has evaporated billions of dollars out of their market capitalization in a matter of weeks.

According to data from CoinMarketCap, the entire market’s valuation has been slashed by more than half, moving from around $2.2 trillion on January 1 to roughly $900 billion at the moment.

In this environment, centralized exchanges, considered by many the backbone of the ecosystem when it comes to mainstream adoption, are facing a steep hill moving forward as their top-line performance will suffer significantly.

These exchanges earn money mostly from the collection of transaction fees. How much they collect depends on multiple factors. First, when the value of digital assets moves higher, percentage-based fees bring in more money to these companies.

Meanwhile, if trading volumes are high, revenues tend to increase as well as fees are collected more frequently.

Also read: How to Buy Cryptos with Low Fees in 2022

With this in mind, if the value of cryptos has collapsed by more than 50% in less than 6 months, it seems easy to conclude that most exchanges will likely struggle with their finances.

The question is, who is in the best position to survive the downturn and who is poised to go under?

In recent weeks, there have been some interesting developments concerning this particular segment of the industry. Among the top firms announcing that they will be letting go a fraction of their personnel we find the following:

  • Coinbase – 1,100 employees.
  • Crypto.com – 260 employees.
  • BlockFi – 170 employees.
  • Gemini – 100 employees.

Other smaller exchanges have had to adopt even more severe measures as is the case of Argentina’s Buenbit crypto exchange, which had to lay off as much as 45% of its payroll to withstand the crypto winter.

Your capital is at risk.

The Public’s Confidence in Crypto Companies Has Been Eroding

There have been some prominent incidents that could have affected the financial stability of some of these companies. This includes the debacle of Terra’s native tokens LUNA and UST – a catastrophic event that led to billions of dollars in losses to investors.

Meanwhile, the Celsius Network – arguably the largest crypto savings and lending platform in the space – recently halted all withdrawals, transfers, and swaps. This exchange reportedly managed around $20 billion in assets on behalf of investors back in August 2021.

The reason why these events are concerning is that multiple exchanges such as Binance and FTX have created venture capital firms that invest in early-stage projects within the space.

Despite how good their intentions could be, the traditional financial industry follows practices that prevent certain areas of a financial conglomerate from overlapping with those of other riskier segments of the business to limit the impact that losses on the riskier side can have on the units that should supposedly custody money from investors and account holders.

Customers’ Assets Are Not as Safe as Most Think with Crypto Exchanges

top crypto exchanges by trading volumes

Top 5 Crypto Exchanges by Trading Volumes (24H) – Source: CoinMarketCap

The lack of regulatory oversight is one of the most concerning issues at the moment as nobody knows exactly what’s going on beneath the hood in the top centralized exchanges.

Just days ago, FTX – the company headed by Sam Bankman-Fried – had to loan money to BlockFi, another crypto exchange, to help it survive the downturn. BlockFi said that it planned to use the funds to bolster its balance sheet but questions remain such as:

  • How much money they are losing?
  • What kind of assurances do investors have in case the company goes under?
  • Do they segregate accounts?

All of these questions remain unanswered and the recent incident with the Celsius Network is a good example of what can happen to investors’ money if they don’t understand who they are dealing with.

Thus far, there have been no updates to the situation at Celsius. Investors are still unable to withdraw their money or transfer it to another exchange.

Celsius may have been the first, but it will hardly be the last, especially if the value of cryptos keeps declining in the following weeks.

Companies that are publicly traded such as Coinbase may be the safest place at the moment as they are more transparent with their finances since they have to comply with the guidelines of the United States Securities and Exchange Commission (SEC), which demand the publication of quarterly earnings reports and material events affecting the firm’s finances.

However, Coinbase recently painted a picture of what would happen with the assets under their custody if the exchange goes under. The company added the following clause to its risks factors: “because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors”.

What this means is that customers’ assets may not be treated as such if bankruptcy occurs. Instead, they are going to be treated as if they belong to Coinbase as regulations concerning digital assets in these particular proceedings are not too clear.

Bottom line

As a rule of thumb, the most obscure and smaller exchanges are the most sensitive to succumb if they face a run-on-the-bank. In addition, their finances may already be under siege if their revenues have declined to the point that they are losing money and burning cash by the day.

Which exchange will go under first is unclear, but it seems clear that BlockFi is not doing as good as one would think considering that they had to ask for money from a competitor.

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