Bitcoin fever exposes crypto-market frailties

NEW YORK: As bitcoin raced to another record high 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 m

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.

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, which is worrying some investors.

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

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

“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,” the company’s director of business operations, David Farmer, said.

“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 told Reuters.

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 today (Tuesday) to mitigate further issues for customers,” a spokesman said.

“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.

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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.”

Charles Cascarilla, chief executive of New York-based company Paxos, which operates cryptocurrency exchange itBit, told Reuters that dealing with spikes in volume was a problem faced by all exchanges, not just cryptocurrency platforms.

“Clearly the reality is the world of cryptocurrency is growing at an exponential rate right now and everyone is doing their best to expand infrastructure, but it is hard to know what would happen in a hypothetical scenario,” he said.

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 existed, 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.”

“Most of the exchanges are doing a good job. This is a 24/7 market, there is no session close and there is no downtime.”

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 had said they were worried the 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.

The Chicago-based Cboe Global Markets Inc. futures launched a futures contracts on bitcoin on Dec. 10 and CME Group Inc will launch a rival contract a week later. So far this week, the launch of futures by Cboe does not appear to have created any additional volatility, with price moves less violent than last week’s wild trading.

But Tim Swanson, a bitcoin expert and founder of Post Oak Labs, a technology advisory firm, said he was concerned that if the futures liquidity increases there could be an incentive for someone with a large bet against bitcoin to disrupt or attack the network to make money from the ensuing price fall.

CME Group and Cboe declined to comment.

Flooding the bitcoin network with tiny transactions could potentially send the price down sharply, said Swanson, as could sending many sell-signals to the market that are not honoured – so-called spoofing, which is illegal in regulated markets.

A surge in bitcoin trades in recent weeks has also left the blockchain network that the cryptocurrency relies on to process and verify transactions struggling to keep up.

As of Wednesday at 1445 GMT, more than 125,000 bitcoin transactions remained unconfirmed.