May 22, 2015

Bitcoin Exchanges Represent Considerable Risk

bitcoin exchanges

Bitcoin exchanges convert the popular digital currency into national currencies based on fluctuating rates. But the exchanges pose potential risk to users, a study finds.

A recent paper by researchers at Southern Methodist and Carnegie Mellon universities (PDF) says that 45 percent of the exchanges fail. The paper also says most close their doors without refunding users’ money.

Bitcoins have captured the interest of entrepreneurs worldwide. They are popular with businesses operating online and across International borders. Part of this appeal is that they are not regulated by any bank or country.

Researcher Tyler Moore, of the Lyle School of Engineering, Southern Methodist University, Dallas, explains his team’s findings in this video.

Researchers studied 40 Bitcoin exchanges on the Internet offering to convert Bitcoins into other currencies or back again, according to a summary of the report in Wired.

Of those, 18 have closed, 13 of them without warning, and only six have made an effort to refund the money deposited by users. The study also found that cyber attacks were not the main cause of Bitcoin exchanges closing. Only five of the exchanges the report studied shut down due to an attack from cyber criminals.

Moore avoids specifics about the major cause for exchange failure in his video explanation. But he says that businesses fail for a variety of reasons, including lack of interest in their products or services.

The study determined that smaller exchanges were much more likely to fail than their busier rivals. Conversely, larger exchanges were more likely to be victims of cyber attacks, Moore explained.

For example, researchers found exchanges handling 275 Bitcoins worth of transactions daily have a 20 percent chance of being breached. Compare that to exchanges handling daily exchanges of 5,570 Bitcoins. These exchanges face a 70 percent chance of successful attack.

The projected lifespan of Bitcoin exchanges is also cause for worry. The study predicts the median lifespan of a Bitcoin exchange at 381 days with a 29.9 percent chance that a new exchange will close within the first year.

Bitcoin Photo via Shutterstock


Joshua Sophy - Staff Writer

Joshua Sophy Joshua Sophy is a staff writer for Small Business Trends, covering technology and business news. He is a journalist and editor with 15 years experience in media. A former newspaper reporter and editor, Joshua also serves as President of the Board of Directors of a curling club and is editor of a regional newsletter focused on the sport of curling in the Eastern U.S.

8 Reactions

  1. Too many people treat Bitcoin like a stock to buy bought and sold. The exchanges should be used for just that purpose. To exchange your government currency for bitcoins.

    Once you convert your old currency to bitcoins and move your bitcoins safely to your wallet there is absolutely no way to lose them.

    The day traders are the most susceptable to risk if they have their money tied up on a new or untrusted exchange.

  2. save your money

  3. PreyPal + BitCoin—now there’s a potential match made in heaven …

    And the ugly reality for consumers, particularly payees, dealing with the clunky PayPal …

  4. 80% of all bitcoin exchange is now handled by a single exchange, MTGOX. When MTGOX was hacked recently, I got all my bitcoins back by submitting transaction logs – MTGOX refunded me.

  5. Well I guess its bitcoin era, I never used them but your article helped to learn more about it.

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