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Revisiting the risks of Bitcoin currency exchange closure
Moore T., Christin N., Szurdi J. ACM Transactions on Internet Technology18 (4):1-18,2018.Type:Article
Date Reviewed: Mar 26 2019

As someone who has written a few general articles on the topic of Bitcoin and cryptocurrencies, this review assignment was extremely interesting to me. Because of its specificity, it was interesting to delve into an aspect of currency exchanges that is mentioned in articles tangentially. This study of “the track record of 80 Bitcoin exchanges established between 2010 and 2015,” where “nearly half (38) have since closed, with customer account balances sometimes wiped out,” contributes to the knowledge about this new phenomenon when it comes to currencies and finance. Finding connections among security breaches, transaction volume, and the popularity of the currency, whether it be Bitcoin or some other cryptocurrency, is the goal of this study.

The wild ride that Bitcoin has taken over the past few months, from November 2017 to the end of 2018, has been a cause for curiosity for those who want to know the future of Bitcoin as a substitute currency for the dollar or as an alternative store of value for gold. This survey focuses on “one type of intermediary, currency exchanges, and ... the risk Bitcoin holders face from exchange failures.” Because of its success, “Bitcoin has been repeatedly targeted by fraudsters” who have stolen or pilfered from its trading platforms and currency exchanges. Thus, such activities make it ripe for scrutiny in this study.

The authors find that exchanges that experience a breach have a higher likelihood of closing the same quarter that they experience the breach. However, those exchanges that transact in higher volumes and “derive most of their business from trading less popular (fiat) currencies ... are less likely to close.” The study makes use of the following measures to characterize the exchange data: 1) the exchange lifetime, which is the number of days an exchange has been operational; 2) the exchange average daily trade volume, which is calculated quarterly; and 3) the competitive level of the currency offered by the exchange.

The study also draws other findings and conclusions, for example, “the overall failure rate of Bitcoin exchanges is 48 percent, and the median lifetime of exchanges is 451 days.” The authors admit that there are limitations to the statistical analysis of the study, and there are many areas for further research, such as examining the cumulative effect of an exchange suffering multiple breaches; whether the minority of exchanges that do not hold customer Bitcoins for long periods are more or less likely to close; and how closure affects individual investors. The authors open the door for some policy recommendations, such as the establishment of an external regulator like the Federal Deposit Insurance Corporation (FDIC) to handle exchange failures in an orderly fashion, so that mechanisms can be devised to ensure a fair and equitable distribution of available funds when exchanges close. Finally, as more cryptocurrencies are created beyond Bitcoin, “the unique characteristics of Bitcoin users and investors” can be used to compare these fiat currencies. It is the kind of work worth exploring in the future.

Reviewer:  Cecilia G. Manrique Review #: CR146492 (1907-0290)
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