Crypto Wallet vs. Platform: The Mortgage Risk You Should Know About

In 2022, the crypto market experienced a significant downturn that silently caught many investors off guard: Celsius’s collapse, Voyager Digital — both were platforms where people believed their assets were safe. They were not. The entire situation highlighted a harsh reality: if you do not control your crypto wallet, your assets are actually owned by someone else.

What happened in 2022: When rehypothecation broke platforms

Recall one word: rehypothecation. This is when a platform takes user funds and lends them out to others (often hedge funds or other regulated entities) at higher interest rates. The platform earns the difference and pays you a certain percentage. The business idea is simple: every link in the chain functions as intended. Until it doesn’t.

Celsius’s network collapsed because they took on too much risk. Part of their invested funds in DeFi protocols became unprofitable, and instead, they simply defaulted. Users couldn’t withdraw their money.

Voyager’s case was even more direct. They lent hundreds of millions of dollars in digital assets to the hedge fund Three Arrows Capital (3AC). When 3AC went bankrupt, Voyager also defaulted. Users were left without their funds.

Rehypothecation: Capital works twice but is at risk twice

Suppose you deposit 1 BTC on a platform offering 5% annual yield. At first glance, it’s simple: your money grows. But what’s really happening?

1. You deposit 1 BTC
2. The platform takes 1 BTC and lends it to a hedge fund at 8% yield
3. The platform pays you 5%
4. The platform keeps 3% for itself

This transaction structure resembles a Russian nesting doll: the more layers, the more fragile it becomes. If the hedge fund (which owns your Bitcoin but doesn’t tell you) makes a bad trading decision, your BTC can be at risk.

The risk of default: bank run

Here’s the main problem: when a platform doesn’t lend to the other side, it cannot return your loan. This is a bank run scenario:

Platform → Hedge fund (borrower B) → Your assets become at risk. If the hedge fund cannot fulfill its obligations, the entire chain collapses.

This reflects the financial health of an organization you don’t know. You rely on their decisions.

What if many people withdraw their funds simultaneously?

Market fluctuations cause users to decide to withdraw their assets at the same time. This is known as a bank “run.” If the platform has lent your funds in long-term or illiquid investments, it cannot pay everyone at once.

What happens then? Usually: suspension of withdrawals, followed by insolvency.

Debtor vs. creditor: the law is slow

In traditional broker accounts (e.g., in the US), rehypothecation limits are set: no more than 140% of the total credit balance. This is backed by insurance.

In the crypto space? Regulations are still being developed. Many platforms include clauses in their terms of service threatening: by depositing funds, you transfer ownership of your assets to them. In case of insolvency, depositors — including you — are often considered “secured creditors,” which only means they are last in line.

How to reduce the risk of rehypothecation: my first simple advice

Most importantly: control your wallet

The most effective way to avoid rehypothecation risk is to use your own crypto wallet that only you control. If your private key is solely in your possession, no one can lend out your Bitcoin without your consent. The phrase “your wallet” is often discussed here because it’s where trust is established: your keys, your assets.

Second: read the fine print

The biggest rehypothecation risk comes from reading the terms of service. Look for “assignment of rights” or “pledge rights” — these are professional terms for rehypothecation.

Third: verify high yields cautiously

Be skeptical of offers promising 15%, 20%, or higher annual returns. If a platform offers this, it often indicates a risky rehypothecation strategy written into their terms.

Fourth: use segregated custody

Some institutional custody services offer segregated storage of funds. This is important: your assets remain isolated from the platform’s other assets.

The main lesson: control your keys, control your wallet

Dealing with rehypothecation is complex. On one hand, it provides market liquidity and allows passive income from idle assets. On the other hand, it introduces systemic risk that can lead to defaults and capital losses.

Ultimately, it’s your decision. But remember the old saying: “If you hold the keys, you hold the coins.” If only you control your crypto wallet, the risk of rehypothecation is only faced by those who have deposited on platforms.

The basic truth: your wallet, your control, your security.