Thursday, January 30, 2025

How to avoid the next crypto collapse: a new study unveils the factors behind cryptocurrency exchange failures

University of Vaasa

Imagine logging into your cryptocurrency exchange platform one morning only to find the website down, your funds gone, and no one to answer your questions. This nightmare has been a harsh reality for thousands of traders, with nearly 500 cryptocurrency exchanges having already failed. A new study from the University of Vaasa, Finland, sheds light on the risk factors in cryptocurrency exchanges.

In his study, published in the valued Journal of International Financial Markets, Institutions & Money, Assistant Professor Niranjan Sapkota analyses data from 845 cryptocurrency exchanges to investigate why nearly half of these exchanges have collapsed since 2014 and how to predict such defaults. He identifies several key indicators including transparency, centralisation, territorial access, fee structures, coin listings, referral schemes, etc., offering valuable insights into mitigating risks in this evolving market.

When transparency becomes a double-edged sword

Centralised exchanges in developed, transparent, and well-regulated countries, such as United States and Singapore are often perceived as the safest. According to the study, they are surprisingly fragile. This fragility arises from pressures such as stringent regulations, high compliance costs, and advanced infrastructures that fraudsters can exploit for illicit activities. In contrast, developing nations, where cryptocurrency adoption remains under policy debate, face fewer such challenges.

– Even more strikingly, exchanges that allow U.S. customers to trade experience higher probability of default compared to those that restrict U.S. clients, Sapkota adds.

All in all, centralised exchanges, which manage wallet custody on behalf of users similar to how traditional banks manage accounts, have a higher risk of default than decentralised exchanges (DEXs), where users retain self-custody of their assets and conduct transactions directly on the blockchain. DEXs have a 31.2% lower probability of failure compared to centralised platforms, as their distributed structure mitigates risks related to fraud, operational mismanagement, and liquidity crises.

Warning signs: high fees, limited coin listings and poor ratings

According to the study, high withdrawal fees often signal financial instability. Defaulted exchanges charged withdrawal fees on average 1.5 times higher than operational ones.

Furthermore, exchanges offering a wide variety of cryptocurrencies and maintaining high user ratings are more likely to survive. A diverse range of cryptocurrencies attracts a larger user base and ensures steady revenue streams whereas high user ratings typically reflect strong operational practices. The study also indicated that exchanges with referral incentives are less likely to default.

– So, next time a friend shares a legitimate crypto exchange referral link, don’t dismiss it as mere bonus hunting, says Dr. Sapkota.

Robust results for creating a safer crypto ecosystem

This cutting-edge research bridges a critical knowledge gap in the emerging field of cryptocurrency exchange risk, offering the knowledge needed to approach the market with greater confidence, and actionable solutions for more secure blockchain-based digital asset trading platforms.

The study also highlights the effectiveness of traditional statistical methods, such as logit and probit models, in predicting cryptocurrency exchange bankruptcies, achieving an accuracy rate of approximately 81%. Cutting-edge machine learning techniques, including Random Forest, Support Vector Machine, and Stacked Ensemble, validate these findings.

– Policy makers can leverage these findings to design policies that protect users and strengthen market stability. Investors and traders can learn to spot critical red flags – such as poor ratings, excessive withdrawal fees, limited coin offerings, centralised exchanges, and U.S. client access – to avoid unreliable platforms and safeguard investments, Sapkota explains the applications of his research.

Further information

Sapkota, N. (2025) The Crypto Collapse Chronicles: Decoding Cryptocurrency Exchange Defaults. Journal of International Financial Markets, Institutions & Money. Vol. 99, article 102093.

https://doi.org/10.1016/j.intfin.2024.102093

Journal

Journal of International Financial Markets Institutions and Money

DOI

10.1016/j.intfin.2024.102093

Method of Research

Data/statistical analysis

Article Title

The crypto collapse chronicles: Decoding cryptocurrency exchange defaults

SPACE/COSMOS

Small and yet so powerful

The hidden power of the smallest microquasars

Max-Planck-Institut fur Kernphysik

Artist’s impression of a microquasar system — image:
A star and a black hole orbit each other closely: mass from the star is captured by the black hole. As a consequence of this, a pair of jets launch away from the black hole.
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Credit: Science Communication Lab for MPIK/H.E.S.S.

The production and acceleration of the highest energetic cosmic rays (charged particles) are still one of the biggest mysteries in astroparticle physics.

Very efficient acceleration of cosmic particles seems to happen in the jets of microquasars. However, up until now this was only observed in rare high-mass-microquasar systems.

Researcher have now for the first time found evidence of particle acceleration in the much more abundant low mass-systems, with significant implications for the estimated contribution of microquasars as a group to the cosmic ray content of our Galaxy

Our home planet is bombarded with particles from outer space all the time. And while we are mostly familiar with the rocky meteorites originating from within our solar system that create fascinating shooting stars in the night sky, it’s the smallest particles that help scientists to understand the nature of the universe. Subatomic particles such as electrons or protons arriving from interstellar space and beyond are one of the fastest particles known in the universe and known as cosmic rays.

The origins and the acceleration mechanisms of the most energetic of these cosmic particles remains one of the biggest mysteries in astrophysics. Fast-moving matter outflows (or “jets”) launched from black holes would be an ideal site for particle acceleration, but the details on how and under which conditions acceleration processes can occur are unclear. The most powerful jets inside our Galaxy occur in microquasars: systems composed by a stellar-mass black hole and a “normal” star. The pair orbit each other, and, once they are close enough, the black hole starts to slowly swallow its companion. As a consequence of this, jets are launched from the region close to the black hole.

In the past couple of years there has been growing evidence that microquasar jets are efficient particle accelerators. It is however unclear how much they contribute, as a group, to the total amount of cosmic rays in the Galaxy. The answer to this question requires understanding if all microquasars are able to accelerate particles or only a lucky few.

Microquasars are usually classified depending on the mass of the star in the system into either “low-mass” or “high-mass” systems, with lower-mass systems being much more abundant. However, up until now evidence of particle acceleration was only found for the high-mass systems. For example, the microquasar SS 433, which was recently revealed to be one of the most powerful particle accelerators in the Galaxy, contains a star with mass approximately ten times that of the Sun. Consequently, it was generally believed that low-mass microquasars were not powerful enough to produce gamma-rays. Dr. Laura Olivera-Nieto from the Max-Planck-Institut für Kernphysik in Heidelberg, Germany (MPIK) and Dr. Guillem Martí-Devesa from the Università di Trieste, Italy have now made a discovery that shakes this paradigm. They used 16 years of data from the Large Area Telescope detector onboard NASA’s satellite Fermi to reveal a faint gamma-ray signal consistent with the position of GRS 1915+105, a microquasar with a star smaller than the Sun. The gamma-ray signal is measured to have energies higher than 10 GeV, indicating that the system could accelerate particles to even higher energies.

The observations favor a scenario in which protons are accelerated in the jets, after which they escape and interact with nearby gas to produce gamma-ray photons. In the paper, published in the Astrophysical Journal Letters, they also use data from the Nobeyama 45-meter radio telescope in Japan, which indicates that there is enough gas material around the source for this scenario.

This result shows that even microquasars hosting a low-mass star are capable of particle acceleration. Because this is the most numerous class, this finding has significant implications for the estimated contribution of microquasars as a group to the cosmic ray content of our Galaxy. However, more detections and multi-wavelength studies will be required in order to further narrow down why some systems accelerate particles efficiently but not all.