Date
21 October 2018
As investors pile into bitcoin amid a speculative frenzy, it is putting the systems of trading platforms under severe test. Photo: Reuters
As investors pile into bitcoin amid a speculative frenzy, it is putting the systems of trading platforms under severe test. Photo: Reuters

Bitcoin mania puts exchanges under severe strain

As bitcoin mania continues, taking the virtual currency to new peaks, a huge spike in investor activity is putting stress on trading platforms and giving rise to various problems including hacker attacks.

On Tuesday, one of the biggest providers of digital currency wallets, Coinbase, went down under the weight of traffic, leaving many of its more than 10 million customers unable to access their funds, Reuters reports.

At the same time, Bitfinex, the world’s biggest bitcoin exchange by trading volume, said it was under a heavy denial-of-service (DDoS) attack, meaning its servers had been intentionally flooded with junk online requests, taking down its website and crippling its services, it said.

The latest outages show how the market infrastructure for an immature and volatile instrument that millions of investors have piled into may be ill-equipped to cope with sudden shifts in demand, the report noted. 

During a particularly volatile period of trading on Dec. 7, bitcoin surged from below US$16,000 to US$19,500 in less than an hour on Coinbase’s exchange GDAX, while it was changing hands at less than US$16,000 on another exchange, Bitstamp.

As trading volume surged, GDAX and Coinbase went down at least 10 times because of record-high traffic.

“More people are engaging with our platform than ever and that bodes well for the future of the digital currency. At the same time, it does create extreme volatility and stress on our systems,” David Farmer, Coinbase’s director of business operations, told Reuters.

“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,” he said.

Bitfinex said it had been under a sustained DDoS attack since last week.

“While last week the platform traded continuously, to effectively perform emergency maintenance, we took the website down for a brief time (on Tuesday) to mitigate further issues for customers,” a spokesman was quoted as saying.

“We are constantly improving our systems to ensure that we’re able to both accommodate the immense volume of trading that occurs on our platform while also fending off sustained DDoS attacks,” he said.

Daniel Masters, founder of Global Advisors Bitcoin Investment Fund, worries the exchanges would struggle to cope if there were a sudden rush for the exit.

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

Cameron Winklevoss, co-founder of the Gemini exchange, an early bitcoin investor and an outspoken supporter of the cryptocurrency, said the risk the wider market would suffer badly if one exchange went down no longer exists, as trading volume had become more evenly spread.

“We are definitely beyond the too-big-to-fail situation,” he told Reuters. “That was a problem we had five years ago when Mt. Gox accounted for 95 percent of volume.”

Mt. Gox, the world’s biggest bitcoin exchange at the time, collapsed in 2014 after hackers stole 650,000 bitcoins, triggering a collapse in the bitcoin price.

The demise of Mt. Gox left more than 24,000 customers unable to access hundreds of millions of dollars of cryptocurrency and cash. More than three years later none has recouped a cent.

Some investors now worry that launch of bitcoin futures by the world’s biggest derivative exchanges could exacerbate volatility by prompting some traders to take out large positions betting on a price fall in the future.

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RC

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