Investing in bitcoins can be risky. So it's probably not surprising that starting a bitcoin currency exchange is risky too.
Online bitcoin exchanges have a failure rate of 45 percent, with customer balances often wiped out, a new study has found.
"Bitcoin is expressly designed to be completely decentralized with no single points of control," says Tyler Moore, one of two US computer scientists who worked on the research study. "Yet currency exchanges have become de facto central authorities, and their success or failure drives bitcoin's success or failure."
Moore and Nicolas Christin looked at 40 bitcoin exchanges, examining the risk bitcoin holders face from exchange failures. (Click here to view a video of Moore discussing the research.)
Eighteen of the exchanges studied have gone out of business. Nine experienced security breaches from hackers or other criminal activity, forcing five of them to subsequently close. Another 13 closed without any publicly announced breach.
Of the 18 exchanges that closed, there were 11 where the authors found evidence of the customers having been reimbursed. Five exchanges have not reimbursed customers while six claim to have done so.
"The risk of losing funds stored at exchanges is real but uncertain," the study states. "Fraudsters are sometimes to blame, but not always."
The median lifetime of exchanges is just 381 days, Moore and Christin found. They also discovered that currency exchanges that buy and sell higher volumes of bitcoins are less likely to shut down, but more likely to suffer a security breach.
"(T)he continued operation of an exchange depends on running a high transaction volume, which makes the exchange a more valuable target to thieves," Moore and Christin write in their study.
The most popular bitcoin exchange, Mt, Gox, has been breached multiple times.
Moore and Christin's study, "Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk," was accepted as a paper to be featured at the 17th International Financial Cryptography and Data Security Conference held in Okinawa, Japan, earlier this month.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.