Technology reporter Jacob Aron with New Scientist covered the Bitcoin research of SMU cybersecurity expert Tyler W. Moore, an assistant professor of computer science in the Lyle School of Engineering.

Moore’s research found that online exchanges that trade hard currency for the rapidly emerging cyber money known as Bitcoin have a 45 percent chance of failing — often taking their customers’ money with them.

The finding is from a new computer science study that applied survival analysis to examine the factors that prompt Bitcoin currency exchanges to close.

Moore carried out the research with Nicolas Christin, with the Information Networking Institute and Carnegie Mellon CyLab at Carnegie Mellon University.

Aron’s coverage, “Bitcoin hits $200 but swapping for real money is risky,” was published online April 9.

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Jacob Aron
New Scientist

Online currency Bitcoin hit yet another record high today as it smashed through the $200 barrier, but a new analysis of Bitcoin exchanges shows that swapping real-world cash for its virtual equivalent can be a risky business.

The stratospheric rise of Bitcoin in recent days – it was at $70 just two weeks ago and less than $10 when we first wrote about it – has left many wishing they had got in on the currency when it was much cheaper. But it is easy to forget that Bitcoin exchanges, where many users store their cash, have a history of being hacked or even folding altogether.

Tracking the fortunes of 40 such exchanges over the past three years, Tyler Moore of Southern Methodist University in Dallas, Texas, and Nicolas Christin of Carnegie Mellon University in Pittsburgh, Pennsylvania, discovered that 18 have closed. Of these, five failed to reimburse their customers, while six claimed they did. The pair were unable to confirm either way for the remaining seven exchanges.

The pair also used mathematical modelling to predict the general behaviour of Bitcoin exchanges, and found that there is a 30 per cent chance of an exchange folding within one year of opening, increasing to nearly 80 per cent after two years.

Unsurprisingly, the larger exchanges such as Mt.Gox are much less likely to implode, but the findings suggest these popular money-swappers are also at greater risk of hack attacks. “The continued operation of an exchange depends on running a high transaction volume, which makes the exchange a more valuable target to thieves,” say the pair in a paper presented at the Financial Cryptography conference in Okinawa, Japan, last week.

So, jump on the Bitcoin bandwagon by all means – but as with all investments, don’t risk anything you aren’t prepared to lose.

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