The Unique Risks of Cryptoassets — Hacking, Regulation, Exchange Risk

In the earlier article, we saw Bitcoin's -80% drawdown. But the risks of cryptoassets are not only price movement.

Stocks are traded within institutional safeguards like stock exchanges and central securities depositories, and a long regulatory history. Cryptoassets, by contrast, have a short history, regulations differ from country to country, and if the exchange where you deposited your assets collapses, you could lose your money entirely.

In this article, we look, alongside actual events, at the 'structural risks' you must know besides price.

The most painful risk in cryptoasset history is 'exchange collapse.'

In 2014, Mt. Gox, then the world's largest Bitcoin exchange, suddenly halted withdrawals and went bankrupt. About 850,000 Bitcoins vanished, which was about 7% of all the Bitcoin in the world at the time. The victims had to wait about 10 years to get their assets back.

In November 2022, FTX, a world-class large exchange, collapsed within days. It was revealed that it had secretly siphoned customers' deposited money into an affiliate, and a hole of about $8 billion in customer funds was confirmed. The founder was sentenced to 25 years in prison on fraud charges.

Besides exchange collapse, there are several other risks to watch out for.

Hacking: Incidents where exchanges, wallets, and cross-blockchain bridges are hacked and assets stolen have repeated. Once coins leak out, they are very hard to recover.

Regulatory uncertainty: Laws and regulations on cryptoassets differ from country to country and change often. A particular coin can be delisted or trading restricted, so regulatory change itself is a large risk.

Absence of depositor protection: Bank deposits are protected up to a certain amount by systems like the Korea Deposit Insurance Corporation (the FDIC in the U.S.). But cryptoassets have no such protection. If an exchange fails, the state does not pay you back on its behalf.

Irreversible transactions: Even if you send incorrectly or are defrauded, in most cases it cannot be canceled or refunded like a bank transfer.

In the cryptoasset world there is a famous adage, 'Not your keys, not your coins.'

Depositing coins on an exchange is convenient, but the 'private key' that proves actual ownership is effectively held by the exchange. If the exchange goes bankrupt, is hacked, or halts withdrawals, you may be unable to access your coins. Mt. Gox and FTX were exactly such cases.

But if you keep the private key yourself (self-custody), now the risk arises that you lose the key or have it stolen. In fact, there are many cases where people forgot their password and could never recover it. Either way, the fact that 'if anyone makes a mistake, it cannot be undone' is a fundamental risk of cryptoassets.

This site does not recommend any specific asset. That said, before holding any asset, understanding not only the price drawdown but also these structural risks is the first step in protecting yourself.