redOrbit: Economists Question Bitcoin Stability Despite Meteoric Rise In Value

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Technology reporter Peter Suciu with redOrbit 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.

Suciu’s coverage, “Economists Question Bitcoin Stability Despite Meteoric Rise In Value,” was published online April 25.

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EXCERPT:

Peter Suciu
redOrbit

The bank failures that resulted from the 1929 stock market crash took many people’s life savings with it, and some say the same thing could happen – a albeit on a much smaller scale at least – to those who invest heavily in Bitcoins.

According to a new study from Southern Methodist University in Dallas and Carnegie Mellon University in Pittsburgh, the virtual cyber currency known as Bitcoin could have as much as a 45 percent chance of failing. This could occur if an exchange center that held the currency – much as a bank holds real money – closed, losing customers their Bitcoins and any hard money paid for them.

Bitcoin received a boost in interest this week when PayPal president David Marcus noted that the online payment center would consider making Bitcoin a funding instrument. Many still believe that the sophisticated cyber currency still holds promise for becoming a major international medium of exchange.

Moreover the SMU-CMU study also found that currency exchanges that buy and sell a higher volume of Bitcoins are less likely to shut down. That’s the good news. The bad news is that these transactions are more likely to suffer a security breach.

The encrypted digital currency has been in the spotlight this week, as 87 percent of the nation’s top economists think that the Bitcoin only has “limited usefulness,” reported TechCrunch. This is according to a recent University of Chicago Initiative on Global Markets (IGM) poll of the 38 of the world’s top economists.

“A bitcoin’s value derives solely from the belief that others will want to use it for trade, which implies that its purchasing power is likely to fluctuate over time to a degree that will limit its usefulness,” the IGM findings noted – a general statement that, though intended to downplay the stability of Bitcoin, is actually true of all forms of currency.

Bitcoin exchanges work two ways. In the first, purchasers can go through an online exchange and pay for the virtual currency with hard currency, typically with a credit card. The exchange then transfers the purchased Bitcoins to the buyer’s account. The second way is for Bitcoins to be purchased from local dealers, where the parties meet in person and the buyer pays in cash.

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