Abstract
Bitcoin has enjoyed wider adoption than any previous cryptocurrency; yet its success has also attracted the attention of fraudsters who have taken advantage of operational insecurity and transaction irreversibility. We study the risk that investors face from the closure of Bitcoin exchanges, which convert between Bitcoins and hard currency. We examine the track record of 80 Bitcoin exchanges established between 2010 and 2015. We find that nearly half (38) have since closed, with customer account balances sometimes wiped out. Fraudsters are sometimes to blame, but not always. Twenty-five exchanges suffered security breaches, 15 of which subsequently closed. We present logistic regressions using longitudinal data on Bitcoin exchanges aggregated quarterly. We find that experiencing a breach is correlated with a 13 times greater odds that an exchange will close in that same quarter. We find that higher-volume exchanges are less likely to close (each doubling in trade volume corresponds to a 12% decrease in the odds of closure). We also find that exchanges that derive most of their business from trading less popular (fiat) currencies, which are offered by at most one competitor, are less likely to close.
- Jake Adelstein and Nathalie-Kyoko Stucky. 2016. Behind the Biggest Bitcoin Heist in History: Inside the Implosion of Mt. Gox. Retrieved from http://www.thedailybeast.com/articles/2016/05/19/behind-the-biggest-bitcoin-heist-in-history-inside-the-implosion-of-mt-gox.html.Google Scholar
- Ross Anderson. 2007. Closing the phishing hole: Fraud, risk and nonbanks. In Federal Reserve Bank of Kansas City -- Payment System Research Conferences.Google Scholar
- Elli Androulaki, Ghassan O. Karame, Marc Roeschlin, Tobias Scherer, and Srdjan Capkun. 2013. Evaluating user privacy in Bitcoin. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 7859. Springer, 34--51.Google Scholar
- Simon Barber, Xavier Boyen, Elaine Shi, and Ersin Uzun. 2012. Bitter to better – How to make bitcoin a better currency. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 7397. Springer, 399--414.Google Scholar
- Yoav Benjamini and Yosef Hochberg. 1995. Controlling the false discovery rate: A practical and powerful approach to multiple testing. Journal of the Royal Statistical Society, Series B (Methodological) 57, 1 (1995), 289--300.Google ScholarCross Ref
- David Birch and Neil McEvoy. 1997. Electronic cash -- Technology will denationalise money. In Financial Cryptography (Lecture Notes in Computer Science), Vol. 1318. Springer, 95--108. Google ScholarDigital Library
- Bitcoin Charts. 2015. Markets API. Accessed March 3, 2015. Retrieved from https://bitcoincharts.com/about/markets-api/.Google Scholar
- Bitcoin Talk. 2014. List of Major Bitcoin Heists, Thefts, Hacks, Scams, and Losses. Accessed November 5, 2016. Retrieved from https://bitcointalk.org/index.php?topic=576337.Google Scholar
- Bitcoin Talk. 2015. Bitcoin Forum. Accessed April 3, 2015. Retrieved from https://bitcointalk.org/.Google Scholar
- Bitcoin Wiki. 2015. Bitcoin Wiki. Accessed April 3, 2015. Retrieved from https://en.bitcoin.it/.Google Scholar
- Bitcoin Wiki. 2016. List of Major Bitcoin Heists, Thefts, and Losses. Accessed November 5, 2016. Retrieved from https://en.bitcoin.it/wiki/List_of_Major_Bitcoin_Heists,_Thefts,_and_Losses.Google Scholar
- Rainer Böhme, Nicolas Christin, Benjamin Edelman, and Tyler Moore. 2015. Bitcoin: Economics, technology, and governance. Journal of Economic Perspectives 29, 2 (2015), 213--238.Google ScholarCross Ref
- David Chaum. 1992. Achieving electronic privacy. Scientific American 267, 2 (Aug. 1992), 96--101.Google ScholarCross Ref
- Lulu Yilun Chen and Yuji Nakamura. 2016. Hacked bitcoin exchange says users may share $68 million loss. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2016-08-05/hacked-bitcoin-exchange-says-it-will-spread-losses-among-users.Google Scholar
- Nicolas Christin. 2013. Traveling the silk road: A measurement analysis of a large anonymous online marketplace. In 22nd World Wide Web Conference (WWW’13). 213--224. Google ScholarDigital Library
- Cryptocurrency Market Capitalizations. 2017. Bitcoin Market Capitalization. Accessed November 2, 2017. Retrieved from https://coinmarketcap.com/currencies/bitcoin/.Google Scholar
- Gaby G. Dagher, Benedikt Bünz, Joseph Bonneau, Jeremy Clark, and Dan Boneh. 2015. Provisions: Privacy-preserving proofs of solvency for Bitcoin exchanges. In ACM Conference on Computer and Communications Security. ACM, 720--731. Google ScholarDigital Library
- Christian Decker, James Guthrie, Jochen Seidel, and Roger Wattenhofer. 2015. Making Bitcoin exchanges transparent. In European Symposium on Research in Computer Security (Lecture Notes in Computer Science), Vol. 9327. Springer, 561--576.Google ScholarCross Ref
- Arthur Gervais, Ghassan Karame, Srdjan Capkun, and Vedran Capkun. 2014. Is Bitcoin a decentralized currency? IEEE Security 8 Privacy 12, 3 (2014), 54--60.Google Scholar
- Garrick Hileman and Michel Rauchs. 2017. 2017 Global Cryptocurrency Benchmarking Study. Retrieved from http://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-04-20-global-cryptocurrency-benchmarking-study.pdf.Google Scholar
- Adrianne Jeffries. 2012. Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt. The Verge. Retrieved from http://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-pyramid-scheme-shuts-down.Google Scholar
- Kerem Kaskaloglu. 2014. Near zero Bitcoin transaction fees cannot last forever. In International Conference on Digital Security and Forensics (DigitalSec’14). Society of Digital Information and Wireless Communication, 91--99.Google Scholar
- Mariam Kiran and M. Stanett. 2015. Bitcoin risk analysis. NEMODE Policy Paper.Google Scholar
- Timothy B. Lee. 2012. Hacker steals $250k in Bitcoins from online exchange bitfloor. Ars Technica. Retrieved from http://arstechnica.com/tech-policy/2012/09/hacker-steals-250k-in-bitcoins-from-online-exchange-bitfloor/.Google Scholar
- John Leyden. 2012. Linode hackers escape with $70K in daring bitcoin heist. The Register. Retrieved from http://www.theregister.co.uk/2012/03/02/linode_bitcoin_heist/.Google Scholar
- Sarah Meiklejohn, Marjori Pomarole, Grant Jordan, Kirill Levchenko, Damon McCoy, Geoffrey M. Voelker, and Stefan Savage. 2013. A fistful of bitcoins: Characterizing payments among men with no names. In ACM Internet Measurement Conference. ACM, 127--140. Google ScholarDigital Library
- Tyler Moore and Nicolas Christin. 2013. Beware the middleman: Empirical analysis of bitcoin-exchange risk. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 7859. Springer, 25--33. Retrieved from http://tylermoore.ens.utulsa.edu/fc13.pdf.Google Scholar
- Tyler Moore, Jie Han, and Richard Clayton. 2012. The postmodern Ponzi scheme: Empirical analysis of high-yield investment programs. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 7397. 41--56.Google ScholarCross Ref
- Malte Möser and Rainer Böhme. 2015. Trends, tips, tolls: A longitudinal study of bitcoin transaction fees. In Financial Cryptography and Data Security Workshops (Lecture Notes in Computer Science), Vol. 8976. Springer, 19--33.Google ScholarCross Ref
- Malte Möser, Rainer Böhme, and Dominic Breuker. 2014. Towards risk scoring of Bitcoin transactions. In Financial Cryptography and Data Security Workshops (Lecture Notes in Computer Science), Vol. 8438. Springer, 16--32.Google ScholarCross Ref
- Satoshi Nakamoto. 2009. Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from http://www.bitcoin.org/bitcoin.pdf.Google Scholar
- Fergal Reid and Martin Harrigan. 2013. An analysis of anonymity in the Bitcoin system. In Security and Privacy in Social Networks. Springer, 197--223.Google Scholar
- Dorit Ron and Adi Shamir. 2013. Quantitative analysis of the full Bitcoin transaction graph. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 7859. Springer, 6--24.Google Scholar
- Peter J. Rousseeuw and Mia Hubert. 2011. Robust statistics for outlier detection. Wiley Interdisciplinary Reviews: Data Mining and Knowledge Discovery 1, 1 (2011), 73--79.Google ScholarCross Ref
- Kyle Soska and Nicolas Christin. 2015. Measuring the longitudinal evolution of the online anonymous marketplace ecosystem. In 24th USENIX Security Symposium (USENIX Security’15). 33--48. Google ScholarDigital Library
- The Internet Archive. 2015. Wayback machine. Retrieved from https://archive.org/web/.Google Scholar
- Marie Vasek and Tyler Moore. 2015. There’s no free lunch, even using Bitcoin: Tracking the popularity and profits of virtual currency scams. In Financial Cryptography and Data Security (Lecture Notes in Computer Science), Vol. 8975. Springer, 44--61.Google Scholar
- Concepcion Verdugo Yepes. 2011. Compliance with the AML/CFT International Standard: Lessons from a Cross-Country Analysis. IMF Working Papers 11/177. International Monetary Fund. Retrieved from http://ideas.repec.org/p/imf/imfwpa/11-177.html.Google Scholar
Index Terms
- Revisiting the Risks of Bitcoin Currency Exchange Closure
Recommendations
Bitcoin prices and rupee-dollar exchange rates during COVID-19
Bitcoin is the primary cryptocurrency in the world that can be stored and traded through the internet. Digital contracts and cryptocurrencies created on blockchains have now been used in exchanging instruments on the networks and are available online ...
Double-spending fast payments in bitcoin
CCS '12: Proceedings of the 2012 ACM conference on Computer and communications securityBitcoin is a decentralized payment system that relies on Proof-of-Work (PoW) to verify payments. Nowadays, Bitcoin is increasingly used in a number of fast payment scenarios, where the time between the exchange of currency and goods is short (in the ...
Volatility Spillovers between US Banking Industry and Bitcoin Market: Risk Implications for Banking Industry
ICBCT '20: Proceedings of the 2020 2nd International Conference on Blockchain TechnologyThis paper examines the volatility spillovers between Bitcoin market and US banking industry using unrestricted BEKK-GARCH model. The results show that there is a strong short-term volatility spillover effect in the two markets. However, Bitcoin trading ...
Comments