The recent $36 million hack targeting Upbit’s Solana hot wallet sent shockwaves through the crypto world. Upbit, one of South Korea’s biggest exchanges, confirmed that unauthorized transactions drained assets including SOL, USDC and multiple Solana-based tokens. Withdrawals were suddenly halted, deposits were paused, and users were left watching markets shake while waiting for answers. Upbit later announced that customers would not lose funds because the exchange would cover losses using its own reserves. On the surface, this sounds like a success story the “insurance” worked. But at a deeper level, it reveals something most traders never think about: hot-wallet insurance is not a real insurance system it’s a promise, not a guarantee.
To understand why this matters, we have to step back and look at how cryptocurrencies are stored by exchanges. Hot wallets are always online, connected, ready to send and receive funds instantly. They exist for convenience and trading speed, but that convenience also creates a permanent attack surface. Cold wallets, on the other hand, are offline, harder to access, and typically considered far safer. Exchanges mix both: small amounts in hot wallets to keep withdrawals fast, and large reserves in cold storage for better protection. But as long as even a portion of funds sits online, hackers will always have an opening.
What happened at Upbit in late November reinforces a painful reality. Hackers accessed the SOL hot wallet, moved assets rapidly through the Solana network in multiple transactions, and converted tokens before Upbit’s system could respond. As soon as abnormal movements were detected, the exchange froze Solana-related transfers and migrated remaining funds to cold storage. That security response worked efficiently, but the attack was already complete. Upbit ultimately covered the $36 million loss from company reserves to protect customers and although this left users financially unharmed, the event raises major questions about what “insurance” really means in crypto.
Most traders assume that when exchanges mention “hot-wallet insurance,” their funds are guaranteed like bank deposits. But crypto is not banking, and insurance here works very differently. In most cases, there is no government-backed policy and no formal deposit guarantee. Exchanges typically “self-insure,” meaning they reimburse users only if they choose to and only if their financial position allows it. Some exchanges build special internal protection funds for emergency hacks. A few work with private insurance providers that cover digital-asset crime. But regardless of the model, nothing resembles the certainty of bank deposit protection. If an exchange ever lost more money than it could cover, customers could still suffer losses.
This is why the Upbit hack feels like a paradox. Yes, users were protected and the company handled the crisis better than many expected. At the same time, the incident proves that vulnerability still exists and it can happen repeatedly. Upbit has experienced a major hot wallet hack before. In November 2019, the exchange lost over 340,000 ETH, worth about $50 million at the time. That attack also involved a hot wallet, and Upbit also reimbursed users from corporate reserves. The pattern is concerning because it shows that while exchanges continue to absorb losses, the underlying weak link hasn’t changed: the hot wallet remains a target, and hackers continue to exploit it.
Even though customers didn’t lose funds this time, the market still reacted sharply. Trading slowed, spreads widened, and people hesitated to use the platform until services were restored. When an exchange halts deposits and withdrawals even temporarily liquidity suffers, trader confidence drops, and countless users feel stranded. The psychological impact of “you can’t move your funds right now” is just as powerful as financial loss. This is why hot-wallet breaches cause panic no matter how they are resolved: people do not want their money locked up, even for a short time.
Another point that often gets overlooked is what hot-wallet insurance does not cover. Most of the time, it applies only to large-scale platform-wide thefts. It does not protect you if you fall victim to phishing scams, SIM-swap attacks, malware, stolen login credentials, or any individual account compromise. So even while exchanges promote security, much of the responsibility still falls on each user. Cyber-criminals do not always need to break into an exchange sometimes stealing access to a customer’s login is enough. Insurance rarely applies in those cases.
So what’s the right way to think about security in all this? The answer is balance. Exchanges play an important role in crypto. They offer liquidity, instant trading, lending, staking, and easy on-ramps to digital assets. They are not meant to be long-term storage vaults. For many users, the safest approach is simple: keep only the funds needed for trading on exchanges, and store the rest using self-custody wallets ideally hardware wallets kept offline. In other words, use exchanges as platforms, not as banks.
The Upbit hack has triggered new discussions about whether the industry needs stricter insurance guidelines, independent audits, or regulatory oversight to ensure exchanges can actually cover losses. Some investors insist that crypto storage standards will eventually move closer to traditional finance, with clearer guarantees and transparency around reserves. But until that happens, users should remain realistic and cautious. An exchange may promise reimbursement, but unless that promise is backed by external capital and strict rules, it’s ultimately just that a promise.
The biggest lesson from the Upbit incident is not that crypto platforms are dangerous. It’s that trust must be intentional, not blind. Hot-wallet insurance helps reduce risk, but it doesn’t eliminate it. Market freezes, liquidity disruptions and uncertainty can still strike without warning. Hacks can happen even to reputable platforms, and past reimbursements do not guarantee future outcomes. Security in crypto will always be strongest when users take an active role in protecting their own assets.
The 2025 Upbit hack did not destroy the exchange, and it did not wipe out customer funds. But it exposed a truth the industry has quietly ignored for too long: hot-wallet insurance is not a magic shield it’s a temporary comfort over a structural vulnerability. Until exchanges fully reinvent how they secure online liquidity wallets, the risk will remain. And while the industry works toward stronger standards, one question should stay in every trader’s mind:
