Crypto Exchange Bankruptcies: What Happens to Your Bitcoin Deposits

When a cryptoasset exchange files for bankruptcy, users often assume their Bitcoin and other assets are safe. However, this is not always the case. In reality, most exchange users do not own Bitcoin; they hold a contractual claim against the company.

This distinction is rarely communicated clearly during registration, leaving users with a false sense of security. When an exchange files for bankruptcy, withdrawals are suspended, and the user's balance remains intact on screen, but this balance can be illusory. The platform enters a judicial process, and the client becomes an interested party rather than the holder of an operational account.

The second effect of an exchange bankruptcy is conversion to cash. In some cases, like FTX, court-approved plans establish payments in United States dollars calculated on account value at the bankruptcy petition date. Users do not receive the units of Bitcoin or any other deposited cryptoasset; instead, they receive a nominal amount of fiat currency determined by a valuation fixed in the past.

The combination of these effects explains why users often lose their assets when an exchange goes bankrupt. This is because Bitcoin deposited on an exchange is not preserved in kind during the proceeding, it becomes a monetary claim subject to priority of credits and the court's timelines.