Plain English
Counterparty risk is the risk that an exchange, broker, lender, custodian, or trading partner fails to honor obligations — whether through fraud, insolvency, hack, or regulatory seizure. FTX, Celsius, Voyager, BlockFi, Genesis. Crypto’s recurring lesson: counterparty risk is the dominant risk in most blow-ups, not market risk.
How it actually works
Different layers of counterparty risk: exchange holding your deposit, lending desk holding collateral, custodian holding cold storage, wrapped-token issuer holding backing, stablecoin issuer holding reserves, bridge custodian holding bridged assets. Each adds a layer of “trust this entity to stay solvent and honest.” None are free.
What it means for you
The HNW playbook reduces counterparty risk through diversification: multiple exchanges (none holding more than the active trading buffer), multiple custodians (split between qualified custody and self-custody), and direct self-custody for any long-term position. Stress-test each: if this entity disappeared tomorrow, what would I lose, and how much of net worth is that?
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Educational content only. Not investment, tax, or legal advice.