At the heart of the bitcoin ecosystem lives a vibrant yet immature exchange community. The current exchange space is less than two years old and facilitates approximately $230 million* of daily trading volume across 33 different currencies. Compared to traditional capital markets or FX markets, the daily exchange traded volume is diminutive. However, the potential for growth is immense, especially for an industry that has yet to be adopted by main street or Wall street.
Bitcoin’s market cap has tripled over the past year, increasing from an estimated $1.7 billion to $5 billion. With any young, growing asset class like bitcoin, the ability to appeal to the masses on a global scale is directly impacted by a prospective investor’s trust in the industry and its infrastructure. At the root of every bitcoin investor’s uneasiness to hold funds (both fiat and bitcoin) on an exchange, is the exchange’s custody structure.
There are no self-regulatory organizations (SRO) in the bitcoin space. Right or wrong, each company tailors their own security and custodianship. The current method employed by some of the largest bitcoin exchanges utilizes both hot and cold wallets for the storage, security and transmission of client coins. The structure created to operate these wallets reflects the immaturity of the industry.
It is crucial to find the proper balance between onerous security measures and instantaneous withdrawals. Over the past three years, roughly one million bitcoins, or $370 million (using the average price as of this writing), has been stolen from companies trusted with the safekeeping of client funds. The stories are endless and have the same fundamental issue: hackers using hot wallets as an entry point into a company’s bitcoin storage.
Despite the recent high profile attacks on some of the world’s largest bitcoin exchanges, many exchanges continue to hold large amounts of customer funds in easily accessible hot wallets. Many of the exchange-related concerns that keep bitcoin traders up at night (or day), such as the once pervasive issue of transaction malleability which halted withdrawal operations for the three largest exchanges, are alleviated when withdrawals originate solely from a secure, offline cold storage facility.
Flexcoin. inputs.io. BitFloor. Maybe you remember these companies, but odds are you do not. Much like the bitcoins they once held, they are long gone. At itBit, we operate exclusively out of a cold wallet structure that functions like a hot wallet. We have physical withdrawal procedures that allow our clients to have the best of both worlds: the robust security of cold storage coupled with periodic, 24/7 withdrawal processing. Every bitcoin we secure for our clients, whether it is one bitcoin or 10,000 bitcoins, is handled with the same high level of custody and security.
* Data as of 10/13/14 using 24-hour volume weighted averages across the top nine exchanges that make up 99% of daily trading volume.