Hotbit suddenly announced its closure. Is it a reshuffle in the industry or a trend?

Hotbit's abrupt closure prompts questions about whether it signifies a reshuffle or trend in the industry.

Original text: “Hotbit突然关闭，寿命仅5年，中心化加密交易所出路难觅“

Author: Mary Liu, BitpushNews

On May 22, 2023, Hotbit, a centralized cryptocurrency exchange (CEX) based in Hong Kong, suddenly announced that it would stop operating and users must withdraw their remaining assets by June 21, 2023 at UTC 04:00 (12:00 PM Beijing time). This is the latest centralized cryptocurrency exchange to shut down, following Bittrex US.

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Hotbit facing multiple problems

Hotbit was founded in 2018 and is registered in Hong Kong and Estonia. It claims to have 5 million users, most of whom are located outside of China. The company has listed deteriorating business conditions, changes in the cryptocurrency industry, and risk management issues as reasons for its closure.

Hotbit’s decline began in August 2022, when an investigation into a former employee forced the platform to suspend operations, as law enforcement authorities believed that the employee was suspected of violating criminal law. Since then, multiple Hotbit executives have been summoned by law enforcement authorities to assist in the investigation. In addition, law enforcement authorities have frozen some of Hotbit’s funds, causing the exchange to be unable to operate normally. As the exchange is registered in Hong Kong, some users speculate that it may be under investigation by the Chinese government.

Meanwhile, the cryptocurrency industry is also facing a series of crises, from the collapse of well-known exchange FTX to the banking crisis that caused USDC to decouple. A series of events have led to user funds flowing out of centralized exchanges (CEX) and Hotbit’s cash flow deteriorating.

In addition to external threats, there are internal problems, as the Hotbit exchange has been targeted by multiple cyber attacks, with multiple projects being exploited by malicious actors, further exacerbating the challenges it faces.

The management team mentioned the “change in industry trends” and emphasized the difficulties facing the cryptocurrency market after the collapse of FTX – either accepting regulatory rules or becoming more decentralized.

The announcement stated: “The Hotbit team believes that centralized exchanges (CEX) are becoming increasingly cumbersome, with highly complex and interconnected businesses that are difficult to comply with, whether for compliance or decentralization, and are unlikely to be consistent with long-term trends.”

Failed CEX Cases

Since the emergence of centralized cryptocurrency exchanges, there have been numerous closures due to security vulnerabilities, regulatory issues, and mismanagement. Here are several larger failed cases:

Mt.Gox (2014): Once the largest Bitcoin exchange on the Internet, processing over 70% of the total Bitcoin transaction volume, Mt. Gox suddenly closed due to a security vulnerability, resulting in the loss of 850,000 BTC.

Bitfinex (2016): Although Bitfinex is still operational, it suffered a major security breach in 2016. Hackers stole 119,756 BTC, worth about $72 million at the time. Not all of the stolen funds have been recovered.

QuadrigaCX (2019): Canada’s largest cryptocurrency exchange at the time, QuadrigaCX, suddenly ceased operations and filed for bankruptcy in 2019. The company announced that it had lost access to the private keys and cold wallet holding client funds, resulting in significant losses.

Cryptopia (2019): Cryptopia, a cryptocurrency exchange headquartered in New Zealand, faced a security vulnerability in January 2019, resulting in the loss of millions of dollars worth of cryptocurrency. Following the attack, the exchange was forced to close and filed for bankruptcy.

FTX (2022): FTX is one of the largest cryptocurrency exchanges by trading volume, but declared bankruptcy on November 11, 2022, after failing to meet withdrawal demands. It was later revealed that FTX had pooled client funds to engage in risky trading with Alameda Research, leading to massive losses. The exchange owes over $9 billion to more than a million creditors.

Centralized Exchanges Are “Too Hard”

The closure of Hotbit is not an isolated event, but rather reflects a larger trend in the cryptocurrency industry under uncertain regulation. Coinbase has established international exchanges outside the United States. Earlier this year, the Commodity Futures Trading Commission (CFTC) sued Binance, the world’s largest cryptocurrency exchange, alleging violations of trading and derivative rules. According to The Information, two sources revealed that Zhao Changpeng has been seeking strategies to reduce his stake in Binance US.

The collapse of FTX also adds to the growing skepticism of centralized custody and trading in the cryptocurrency space, with many professionals urging users to hold their own cryptocurrencies or trade on decentralized exchanges. The emergence of decentralized exchanges (DEXs) provides an alternative to centralized exchanges, and their growth has taken a large part of the CEX market share.

In a sense, the story of Hotbit is a reflection of many industry participants – soaring and then plummeting, ambitious but facing cruel realities. Its closure reminds people that even in the decentralized crypto world, the shortcomings of traditional finance – liquidity issues, regulatory scrutiny, and operational threats – still dominate. Platforms that can adapt to changing regulations, maintain strong security measures, and win user trust can stand firm in emerging markets.

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