Analyzing 40 Defunct Exchanges: Common Patterns They Share!

In September,

JPEX Exchange

was exposed for suspected exit scams, making it the largest exchange exit scam event involving the most significant amount in Hong Kong since the opening of

cryptocurrency

exchange licenses. This year, several exchanges have experienced exit scams, where users are unable to withdraw their assets, including BKEX, JPEX, ZT Global, HOUNAX, and others.

In fact, the wave of exchange exit scams has been ongoing since the end of 2021, following the collapse of FTX. Recently, WikiBit has received multiple reports from investors about exchange scams, exit scams, etc., and is currently verifying the information with relevant individuals for follow-up reporting.

We have compiled information on several exchanges that have already exited or closed, categorizing their patterns and reasons for exit.

Scam Exchanges' Top 5 Tactics for “Siphoning” Funds

All the

cryptocurrency exchanges

that have exited can be roughly divided into two categories: those with obvious pyramid scheme characteristics, featuring multi-level incentive systems, and those genuinely developing trading businesses but going bankrupt or running away due to various reasons.

• Founder and Core Team Concealment: Approximately 70% of the exited exchanges are challenging to trace back to their real founders and core team members on the public network. Some founders only use English names publicly, like BISS Exchange founder BMAN, MGEX Exchange co-founder John Podobinski, etc. Many exchanges involved in exit scams find it difficult to locate the masterminds behind the scenes. Furthermore, since most exchanges are registered overseas, investors face significant difficulties in seeking justice.

• Earn Interest on Deposited Coins Scheme: Nearly 90% of the exchanges that have exited previously employed various schemes to earn interest on deposited coins, where the exchange issues its platform token and convinces users to exchange mainstream coins for its platform token. They exaggerate returns through locking assets for staking or providing high annualized yields, creating an illusion of rising token prices, only to exit after exploiting the investors. Examples include MGEX Exchange's mining community, Bitgogo's Gold Lock Plan, IEO X Plan, and more.

• Low-Cost Subscription for Mainstream Coins Scheme: Low-cost subscription of tokens, also known as “non-first-issue discount,” became popular, and some exchanges turned it into a means to exploit users. For instance, SOXEX Exchange initiated five rounds of Bitcoin subscriptions and multiple rounds of platform token subscriptions. It reaped over 2,200 participants and billions in funds in just around 10 days, and the last round of platform token subscription was canceled before it even began.

• Pyramid Scheme Incentive System: While most exchanges implement “refer-a-friend bonuses” as a user incentive system, a significant portion of exchanges that ran away last year directly adopted a pyramid-style incentive system. A classic example is the Wanteenyuan Exchange, which attracted more than 300,000 members within two months through a pyramid model that released commissions through “transaction mining.”

• Listing Numerous Pyramid and Shitcoin Projects: Following the success of model coins and resonant coins on non-top-tier exchanges like MXC and BiKi, many second-tier and third-tier exchanges rushed to list numerous pyramid and scam projects. Collaborating with project parties, they harvested users. As the bubble of these projects burst, users were severely affected, and exchanges that served as accomplices also ran away one after another.

The Inevitable Collapse of Blindly Following “Innovation Models” in the Cryptocurrency Space

As a predator at the top of the crypto food chain, cryptocurrency exchanges are destined to be few. However, according to media reports, by the end of 2018, the number of global cryptocurrency exchanges had already exceeded 11,000. In 2019, the number of exchanges continued to increase, but the number of

cryptocurrency exchange

users did not show a large-scale growth, exacerbating the situation where there are too many exchanges and not enough users.

In 2018, FCoin quickly rose to prominence with its “transaction mining” model. After that, second-tier exchanges such as MXC and BiKi gained a large number of users through IEOs, listing resonance coins, and model coins, which were called “innovations in business models.”

However, these exchanges seemed to underestimate the difficulty of operating and the potential risks of cryptocurrency exchanges. Among nearly 40 exchanges that shut down or went bankrupt, more than 70% closed due to high operating costs, insufficient funds, sudden withdrawal of investment, and other reasons. In addition, a small number of exchanges shut down because of hacking attacks that resulted in stolen assets and an inability to repay user funds, leading to forced closures.

In fact, the cryptocurrency trading market shows a clear “head effect,” with 80% of user traffic concentrated in the top 20 exchanges. The remaining thousands of small exchanges can only share 20% of the market. Second- and third-tier exchanges are struggling to survive, and even smaller exchanges are unable to make ends meet.

From the perspective of industry competition, when exchanges are oversaturated and lack a healthy exit channel, the collapse and shutdown of most exchanges are already a predetermined fate.