At the heart of the recent FTX Saga is that exchanges don't seem to actually have the cryptocurrencies people are depositing. Many ask the obvious: shouldn't they have all the coins? Where could they possibly be losing them?
The answer is that almost every exchange offers margin trading and this is where the blow-ups occur.
Suppose I want to trade 2 BTC on an exchange but I only have 1. The exchange may let me trade as though I have 2 BTC if I custody 1 BTC with them. The result is more bitcoin, and thus exposure to gains, but also tighter margins if losses occur. If the price drops by 50%, I might not just lose 50% of my BTC but all of it. The exchange will want that bitcoin back to ensure against further losses. For even more obscure cryptocurrencies, they'll offer tighter margins.
This isn't unheard of in the non-crypto world. In fact, it happens all the time. Most brokerages will let you do some amount of margin trading.
The problem in crypto is that its extremely volatile. This has been especially true as of late. 
It is a common knee jerk reaction to say "that's dumb, these exchanges should've never allowed margin trading in the first place." But I think that misses the meta-market dynamics of these businesses.
All businesses have power laws in their customer base: 20% of your customers will be responsible for 80% of your revenue or usage. For crypto, those are degenerates who shoot for the moon with every trade. They want margin, they crave margin. When they trade -- and they trade a lot -- they generate a ton of fees. Those fees are the lifeblood of an exchange. If you don't offer margin trading, you'll never get these customers.
Exchanges are also not high margin businesses. They're in the neighborhood of ~4% on total assets in custody.  Getting these big traders is crucial to a sustainable business. So not offering margin trading often means death.
You may be thinking that this sounds like gambling. I wouldn't disagree. It's not a surprise to me that such traders get called the same name in both places: whales. However, much like how first class plane tickets "pay" for cheaper economy tickets by being the lion's share of the airline's revenue, crypto-whale's activity keeps exchanges going for the rest of us schleps. They do so by keeping liquidity circulating on an exchange. That allows for others to trade easily and get just about any crypto on-tap. Fees and effort required would be a lot more if these big whales didn't exist.
Perhaps there will be more competitive advantage being the lender of trust in the future. But today, these exchanges don't have a choice to not offer margin trading.
Disclosure: I'm long bitcoin and ethereum.
: FTX is actually worse here because it appears they allowed for their own token to be used for margin trading ($FTT). I'm not sure if this is confirmed yet by the courts though.
: I'm using Coinbases's rough metrics for this. Some traders have argued Coinbase is way too high when you look at traditional stock brokers which have something closer to 0.25%.