Research Paper: Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Ris

[Stephen Gornick]

by Tyler Moore and Nicolas Christin
Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk [Short Paper]

Presented at Financial Cryptography and Data Security 2013
Seventeenth International Conference, April 1–5, 2013, Okinawa, Japan


 - http://fc13.ifca.ai/proc/1-2.pdf
 - http://docs.google.com/viewer?url=http%3A%2F%2Ffc13.ifca.ai%2Fproc%2F1-2.pdf  <-- Web browser view using Google Docs

 - http://fc13.ifca.ai/slide/1-2.pdf
 - http://docs.google.com/viewer?url=http%3A%2F%2Ffc13.ifca.ai%2Fslide%2F1-2.pdf  <-- Web browser view using Google Docs

Abstract:
We study the risk investors face from Bitcoin exchanges, which convert between Bitcoins and hard currency.
[...]
An exchange’s transaction volume indicates whether or not it is likely to close. Less popular exchanges are more likely to be shut than popular ones. We also present a logistic regression showing that popular exchanges are more likely to suffer a security breach.

[bb113]

Many outliers... Here is what the data looks like:



log scale:

[gwern]

I replicated the statistical core of their analysis (but not the purty pictures) in R: http://www.reddit.com/r/Bitcoin/comments/1d7qkj/study_45_percent_of_bitcoin_exchanges_end_up/c9pc7la

[gwern]

Thanks for the input, Vladimir...

One of the interesting bits is actually how low the daily risk of losing any money is. If you sum the total days the 40 exchanges have been in operation and divide by the 4 instances of money loss, the daily risk is only something like 0.03%.

[BTC Books]

No shit, Sherlock!

You do take 3rd party risk trusting hundreds of thousands of dollars worth of assets to some spotty teenager who has no idea that AWS instances are sometimes get rebooted and that linode has bazillion of same kind of teenagers as sysadmins and who is generally infatuated by all the latest cool cloud services and who thinks that running an exchange on top of a personal bank account is cool etc... I can go on... but I made my point already.

This is even better than a "No shit, Sherlock!", Vladimir.

The fact is, we're doing pretty damn good.

So... 45 whole percent of exchanges started up over the past three years have closed?  This sounds to me like a business to get into.  I mean, the average closure/failure rate of the average small business in the U.S. is somewhere north of 80% after just one year, and of those that survive that first year:

Small business failure rate:

    Year 1:                  85%
    Year 2:                  70%
    Year 3:                  62%
    Year 4:                  55%
    Slowly reducing to 35% failure rate after 10 years.

[http://www.startupbusinesshub.com/small-business-failure-rates/

So basically, if you want your own business and decide that a bitcoin exchange is for you, your odds of success are at least double those of some poor schlub who opens up a hardware store, a barber shop, or buys a franchise for an oil change business.

I am very impressed with how well the bitcoin community has it, and how good we should all feel about our exchanges.