Following the 5th January announcement that it was suffering a “hot wallet issue” later determined to be the work of malicious actors, Bitstamp spent much of the last week offline, temporarily closing what had been among the top three exchanges for BTC/USD trading.
The unexpected news set off a flurry of concerns that, less than one year after the demise of then-leading USD/BTC exchange Mt Gox, history could be repeating itself, and that Bitstamp may be the latest bitcoin exchange to close its doors due to a high-profile hack.
By 9th January, however, Bitstamp indicated it would resume services, promising it was back and better than ever. The exchange initiated trading in the global markets at 21:00 UTC, boasting multisig security, a new back-end cloud infrastructure and commission-free trading.
Indeed, the CoinDesk USD Bitcoin Price Index showed that Bitstamp’s 19:40 UTC announcement that it would resume services caused a spike in the market, with the price of bitcoin rising from $285.66 to a high of $290.71 on the BPI before declining.
But, while Bitstamp is back online, questions still remain regarding whether Bitstamp can win back traders and regain its former market position.
A step off pace
Though rival exchanges ANXBTC, Bitfinex and BTC-e all saw notable increases in weekly volume, data from Bitcoinity indicates that Bitstamp has mostly regained its former position in the BTC/USD market.
BTC/USD exchange trading volume over the last seven days:
After resuming services, Bitstamp quickly overtook LakeBTC and BTC-e in terms of daily trading volume. It now trails market leaders Bitfinex and OKCoin.
Data from a six-month timeframe reveals that Bitstamp has fallen to third-place on the BTC/USD leaderboard from its second-placed position before the hack.
However, other data illustrates that Bitstamp volume growth had slowed when compared to Bitfinex and OKCoin, even before the incident.
BTC/USD exchange trading volume over the last six months:
Still, not all observers were impressed by the figures. Alistair Milne, portfolio manager at Altana Digital Currency Fund, for instance, expressed his opinion that the volume figures are weak considering Bitstamp’s decision to cut fees.
“In zero-fee mode, you’d hope for better,” Milne told CoinDesk.
Trading volume recovers
While Bitstamp may have lost momentum due to the hack, volume figures suggest that the exchange has mostly recovered in terms of daily business. Bitstamp’s current daily figures are actually higher than its six-month daily average prior to last week’s hack.
However it’s worth noting that these figures may not be indicative of a customer response to the exchange, as its relaunch has coincided with a period of unusually high volatility in the price of bitcoin, resulting in larger trading volumes than normal.
The following chart was taken using figures from 10th to 12th January, omitting today’s data, showing the unusually high volume observed across exchanges.
Bitstamp’s 180-day average compared to 3-day average:
Still, some traders reported a difference in the level of service the exchange is providing. Milne noted that he has seen fewer larger buy and sell orders on the exchange.
“As we trade very frequently for the fund, I can say with some certainty that it is harder to trade large amounts on Bitstamp, at least for now,” he said.
Potential business impact
While the hack did not seem to have a measurable effect on Bitstamp’s volume, some market observers expressed their concern about long-term impact the situation and its perception could have on the company.
Economist and investor Tuur Demeester suggested, using Bitstamp’s last audit as a basis, that one could estimate that the hot wallet breach accounted for roughly 9% of the exchange’s total bitcoin holdings. However, he noted that Bitstamp’s last published audit was made public on 24th May, and as such, this figure is only a best estimate.
Milne, too, has been vocal about his belief that Bitstamp’s total reserves may have been reduced by the incident.
Yet another interpretation posed by Demeester put the company’s loss of customer funds in context of its potential 2014 earnings.
Assuming the exchange traded 4.98m BTC in 2014 at a per trade fee of 0.3%–0.5%, Demeester theorized that Bitstamp’s projected profit could be between 14,950 BTC–25,000 BTC.
“In other words, for Bitstamp to replenish the lost reserves of its customers, it may have to spend as much as an entire year’s worth of income,” Demeester said.
Perhaps most troubling to market observers may be the observations of Crypto Currency Fund chairman Tim Enneking, who asserts that an analysis of Bitstamp’s order books suggest certain traders were aware of issues at the exchange prior to the official news.
Enneking added his fund would likely stop trading on the exchange in light of this opinion.
Wake up call
Overall, market observers also differed on any lasting impact that the outage will have on the wider bitcoin market.
Demeester voiced his opinion that the roughly 19,000 BTC stolen in the breach won’t be easily replenished by the company, and that it will have a measurable influence on its ability to satisfy audits, thereby providing the market with transparency.
Enneking seemed less convinced that Bitstamp would be hampered by the outage, arguing that the effects may color market perception for several months before fading.
“It will take a little while for Bitstamp to occupy its old status,” he concluded.
Perhaps the most vocal company on how Bitstamp will affect the larger market has been multisig security provider BitGo. Bitstamp announced on 9th January that it would use BitGo’s multisig wallet product to secure hot wallet funds, replacing its own technology.
— Ben Davenport (@bendavenport) January 9, 2015
Speaking to CoinDesk, BitGo CEO Will O’Brien indicated that that representatives of both companies met in San Francisco and quickly got in the “war room” as part of the wider effort to bring the exchange back online.
“I think that the response that Bitstamp had to address the issues right away, to tell its customers that it was going to reimburse any losses and then embrace the best of breed technology and security platform really speaks to their credit,” he said.
However, O’Brien concluded that the event should be a “wake up call” to the entire exchange industry, which he categorized as slow to integrate services that could potentially mitigate such attacks.
“I think every exchange that is using single key is at risk,” he concluded.
This report was co-authored by Joon Ian Wong. Charts by Joon Ian Wong.
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