Navigating the Treacherous Waters of Cryptocurrency Exchanges: Understanding Risks and Ensuring Your Security in the Wake of the Bybit Hack | by Dr. Ahmed Hatem | The Capital | Mar, 2025

The cryptocurrency market, while offering exciting opportunities for financial growth, is also fraught with risks that investors must understand and actively mitigate. From the inherent volatility of digital assets to the complexities of leveraged trading and the ever-present threat of cyberattacks, participants in this burgeoning financial landscape face a unique set of challenges. Recent events, such as the alleged $1.5 billion hack of the Bybit cryptocurrency exchange in February 2025, attributed by the FBI to North Korean hackers, serve as a stark reminder of the vulnerabilities within the ecosystem and the potential for significant financial losses. This article delves into the critical risks associated with cryptocurrency exchanges, using the Bybit incident as a focal point, while also exploring the dangers of liquidation in leveraged trading and providing essential guidance to help you safeguard your digital assets.

Cryptocurrency exchanges act as vital platforms connecting buyers and sellers of digital currencies. However, they are also prime targets for malicious actors and are susceptible to various operational and market-related risks. Some of the key risks associated with crypto exchanges include:

• Security Breaches and Hacks: As demonstrated by the reported Bybit hack, exchanges hold vast amounts of digital assets, making them attractive targets for cybercriminals. Successful hacks can lead to the theft of users’ funds, resulting in substantial financial losses.
• Market Volatility and Flash Crashes: The cryptocurrency market is known for its extreme price fluctuations. Sudden and significant price drops can occur rapidly, impacting the value of holdings and potentially triggering liquidations in leveraged positions.
• Liquidation Risks in Leveraged Trading: Many exchanges offer leveraged trading, allowing users to control larger positions with a smaller amount of capital. However, this amplifies both potential profits and losses. If the market moves against a leveraged position and the trader’s margin balance falls below the maintenance margin requirement, the exchange may automatically close the position to compensate for losses — a process known as liquidation.
• Insufficient Collateral Management: In leveraged trading, traders must provide initial margin collateral as security for their positions. If the value of their position declines and their collateral becomes insufficient, the exchange’s security system may initiate liquidation to protect both the trader’s account and the exchange.
• Regulatory Uncertainty: The regulatory landscape for cryptocurrencies is still evolving, and changes in regulations can impact exchanges and their operations, potentially affecting users.
• Operational Issues: Exchanges can experience technical glitches, downtime, or other operational problems that may hinder users’ ability to trade or access their funds.
• “Rug Pull” Scams: While not directly a risk of established exchanges, the broader crypto ecosystem includes decentralized projects where founders may abruptly abandon a project after raising funds, leading to significant losses for investors, as exemplified by the LIBRA cryptocurrency scandal where developers conducted a “rug pull,” causing approximately $87 million in losses for 74,000 investors.

The reported $1.5 billion theft from the Bybit exchange in February 2025 highlights the severe consequences of security vulnerabilities in cryptocurrency platforms. According to agency reports cited in the source, the FBI has blamed North Korean hackers for this incident, labeling it the largest cryptocurrency theft in history. The stolen virtual assets represent a massive loss for the affected users and underscore the need for robust security measures by exchanges and vigilant security practices by individual investors. This event also raises concerns about the potential use of stolen funds for illicit activities, such as financing weapons programs.

The “Crypto” excerpts emphasize that liquidation represents a serious risk, especially in leveraged trading operations. It is the forced closing of a trader’s position due to insufficient funds to maintain an open trade. This typically occurs when the margin balance falls below the maintenance margin requirement.

Here’s how liquidation works in leveraged trading:

• Leverage Amplifies Risk: Leverage allows traders to control larger positions with less capital, but it also magnifies potential losses. A price drop in a leveraged long position or a price increase in a leveraged short position can quickly erode the trader’s margin.
• Liquidation Price: Exchanges set a predefined price point called the liquidation price. This threshold is calculated based on the leverage level and the maintenance margin requirement. Higher leverage levels mean that smaller market movements can trigger liquidation more easily. For example, with 5x leverage on a Bitcoin long position, a larger price decrease is needed for liquidation compared to a 20x leveraged position.
• Automatic Closure: When the asset price reaches the liquidation price, the trading system automatically executes the close function. The exchange sells the trader’s collateral to cover the losses on the leveraged position.
• Initial Margin: Traders must provide initial margin collateral to open a leveraged trade. The exchange monitors the trade’s valuation, and liquidation begins when losses approach the value of this collateral.
• Partial and Total Liquidation: Exchanges may implement partial liquidation, where traders are required to close some positions to meet margin requirements, or total liquidation, where the entire active position is closed, resulting in the total loss of the initial funding deposited for that trade.

Key Factors Triggering Liquidation:

• Leverage Level: Higher leverage provides less room for price fluctuations before liquidation occurs.
• Market Volatility: Rapid price movements can quickly deplete a trader’s equity, leading to forced liquidation. The cryptocurrency market’s inherent volatility makes it particularly susceptible to liquidations.
• Collateral Management: Insufficient collateral or a failure to add more funds when a position is losing can accelerate the liquidation process.
• Insufficient Monitoring: Failing to actively monitor open positions can lead to missed opportunities to add collateral or close positions before liquidation.

Examples of Market Liquidations:

The provided source highlights several instances of significant market liquidations:

• Early 2025 Downturn: Over $1 billion worth of positions were automatically sold in a single day due to a major market decline, with Bitcoin and Ethereum accounting for a significant portion.
• June 2023: A decline after the SEC lawsuit against Binance resulted in $320 million in liquidations.
• August 2023: A rapid selloff triggered $1 billion in liquidations.
• December 2024: A market downturn caused over $1.4 billion in liquidations, affecting more than 427,000 traders.

These examples illustrate the pervasive risk of liquidation in the cryptocurrency market, especially during periods of heightened volatility. Massive liquidations can further intensify market declines, creating a cascading effect.

In light of the risks highlighted by the Bybit hack and the constant threat of liquidation, adopting robust security practices is paramount for all cryptocurrency users. Here are essential steps you can take to protect your digital assets:

For Exchange Security:

• Choose Reputable Exchanges: Research exchanges thoroughly before entrusting them with your funds. Look for platforms with a strong security track record, transparent security measures, and positive user reviews.
• Enable Two-Factor Authentication (2FA): Always enable 2FA on your exchange accounts. This adds an extra layer of security, requiring a second verification step (usually a code from your phone) in addition to your password.
• Use Strong and Unique Passwords: Create complex passwords for your exchange accounts and avoid reusing passwords across different platforms. Consider using a password manager to generate and securely store strong passwords.
• Be Wary of Phishing Scams: Phishing attacks are common in the crypto space. Be cautious of emails, messages, or websites that request your login credentials or personal information. Always verify the authenticity of communications before clicking links or providing any sensitive data.
• Limit Funds on Exchanges: Avoid keeping large amounts of cryptocurrency on exchanges for extended periods. Only keep the necessary funds for trading activities.
• Stay Informed About Security Practices: Keep up-to-date with the latest security recommendations and best practices for cryptocurrency users.

For Trading Security and Liquidation Prevention:

• Opt for Sensible Leverage: If engaging in leveraged trading, use leverage cautiously, especially if you are a new investor. Higher leverage amplifies both potential gains and losses, increasing the risk of liquidation. Advanced traders should carefully evaluate market conditions and their risk tolerance before adjusting leverage.
• Utilize Stop-Loss Orders: Implement stop-loss orders to automatically close your positions at a predetermined price level, limiting potential losses and reducing the risk of liquidation during volatile market conditions.
• Maintain a Sufficient Collateral Buffer: Deposit collateral amounts exceeding the minimum requirements for leveraged positions. This provides a buffer against market fluctuations and reduces the likelihood of liquidation.
• Stay Updated on Market Trends: Continuously analyze market data, financial news, and external factors that can influence asset prices. This allows you to make informed decisions and adjust your positions proactively to avoid potential liquidations.
• Diversify Trading Positions: Avoid putting all your capital into a single leveraged trade. Diversifying across multiple assets can help mitigate the impact of losses in one position.
• Monitor Your Positions Regularly: Actively track your open leveraged positions and be prepared to add more collateral or close them if the market moves against you.
• Understand Margin Requirements and Maintenance Margin: Familiarize yourself with the specific margin requirements and maintenance margin levels of the exchange you are using. This knowledge is crucial for managing your risk effectively.

Beyond the Bybit incident, the source highlights other significant events that underscore the risks in the cryptocurrency market:

• Three Arrows Capital (3AC) Liquidation (June 2022): Failure to meet margin obligations led to the liquidation of this hedge fund, with trading losses reaching $3.5 billion.
• Terra Blockchain Collapse (May 2022): The collapse of TerraUSD (UST) and LUNA resulted in a $45 billion market capitalization loss within a week, causing severe investor losses.
• LIBRA Cryptocurrency Scandal (2025): A “rug pull” scheme resulted in approximately $87 million in losses for numerous investors.

These events, along with the frequent instances of market-driven liquidations, emphasize the importance of understanding and managing the inherent risks associated with cryptocurrency investments and trading.

The cryptocurrency market presents both significant opportunities and considerable risks. The reported hack of Bybit serves as a stark reminder of the vulnerabilities that exchanges face, while the mechanics of leveraged trading highlight the ever-present danger of liquidation. By understanding these risks, adopting robust security measures, and implementing prudent risk management strategies, investors and traders can navigate the volatile waters of the cryptocurrency market more effectively and protect their hard-earned digital assets. Staying informed, exercising caution, and prioritizing security are paramount for long-term success in this dynamic and often unpredictable financial landscape.