Revisiting the Risks of Bitcoin Currency Exchange Closure

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.