BTC Exchanges and Counterparty Risk

Question

I'm doing research on the above topic, but so far haven't found any or at the most only limitedly valuable articles/data published in recent time (past 6 months).

What I'm interested in is how users are protected against counter-party risks when using an exchange to trade BTC for fiat currency, and if there is any data available as to how often this protection has been necessary and did or didn't work.

In addition, I'm curious if there are any post-trade security issues (albeit I don't imagine there could be any, asides from the classics like losing your pw, wallet or credentials to the nether or a third party) and general post-trade procedures which alter from the usual bitcoin trade sans exchange service.

Are there numbers declaring these risks? Statistics that are freely accessible, which I might have missed? I've been looking for data the past hour but so far have come up short. Keep in mind, the data should be as fresh as possible.

Of course I do take all kinds of other statements as well - articles, news, reviews. But a neat statistic or similar would quite simply save me the hassle of constructing one myself.

Thanks for your help!

Answer 1

To engage in trading on an exchange, you have to make a deposit of either fiat or Bitcoin. As the balances are then managed by the exchange until paid out, there is no counterparty risk to your trading partner: You can only submit buy and sell orders that are funded. Once your order is matched, the exchange can atomically update the balances of the two users in their database:

When Alice wants to sell one Bitcoin for two hundred dollars, and gets matched to your buy order for one Bitcoin at the same price, your USD balance gets decreased by $200 and hers increased by $200, while her BTC balance gets reduced by 1 BTC, and yours increased by one.

However, there is a counterparty risk to the exchange. The exchange may be e.g. a) running faulty software b) misappropriate funds or c) go bankrupt, resulting in failure to perform payouts. This has happened in the past, most notably in the case of MtGox. Currently, I know of reports suggesting that two more exchanges might be unable to honor their liabilities to their users.

To this end, some exchanges get themselves audited and publish proof of their balances.

It is therefore advisable to keep informed about exchanges that you entrust with your money, and not to keep money on exchanges that you are not using to trade with.

Unfortunately, I cannot serve with a neat statistic on this topic.