bitcoin exchanges frailties

Even as the Bitcoin market struggles to recover from Thursday’s hack of Slovenia-based Bitcoin mining marketplace NiceHash where about 4,736 Bitcoins (about $64million worth) have been reported stolen, there are still indications that there are many frailties within Bitcoin exchanges.

The latest concerns emerged on Tuesday where the online exchange portal of Coinbase, a major digital currency wallet provider in the crypto market, apparently crashed under heavy traffic, preventing more than 10 million traders from accessing their wallets.

This occurred at about the same time that Bitfinex suffered a DDoS attack. Bitfinex, which happens to be the largest Bitcoin exchange by trading volume, released a statement reporting that there had been an intentional flood of online junk requests which overloaded its servers, taking down its site and crippling services.

These latest events, which followed similar stalls that occurred in CBOE’s 1st day of Bitcoin futures trading and other reported outages by GDAX and Coinbase on December 7, are gradually pointing out the frailties in the market. Apparently unprepared for the massive surge in trading volumes from around the world, many exchanges are finding out that their cyber-security apparatuses and market infrastructure are unable to cope with the pressure, thus creating uneasiness among hundreds of thousands of investors.

David Farmer, who is Coinbase’s Director of Business Operations, admitted that there is “extreme volatility and stress on our systems”.

More people are engaging with our platform than ever and that bodes well for the future of the digital currency…we can confirm that there has been no unusual or suspicious activity. All we know right now is that there is a large amount of traffic.” Farmer was quoted in a statement made to Reuters.

Implications

While the surprising surge in Bitcoin prices in the last three months have made many observers to draw an analogy to the dot-com bubble, a bubble may not actually be the cryptocurrency market’s immediate problem. Website downtimes and exchange blackouts as a result of sudden surges in trading volumes on exchanges that are yet to see any institutional involvement are causing a lot of worry for investors and market observers. One of these worried observers is Daniel Masters of Global Advisors Bitcoin Investment Fund.

“The ability of these platforms to handle volume is yet to be tested properly. What happens if this market turns into a lot of sellers? The liquidity itself could be an issue,” Masters opined.

Another stakeholder and one of the Winklevoss twins, Cameron Winklevoss, is however of the opinion that the risk of failure of an exchange affecting the wider market is much lower than when Mt.Gox collapsed because of a wider spread in trading volume.

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This optimism by the co-founder of the Gemini exchange may not assuage worried investors, many of whom are based in jurisdictions where there is no recourse to any means of recovery of lost investments. Mt. Gox collapsed in 2014 after losing 650,000 bitcoins to hackers. The collapse caused more than 24,000 customers to lose access to hundreds of millions of dollars of cash and Bitcoin. Litigations are still pending, and no single investor has been able to recover anything.

Indeed, a Bitcoin bubble may not even be the next big challenge, but the safety and security of the exchanges were the majority of the world’s Bitcoin is traded or exchanged.