Bitcoin Exchanges Plagued by Liquidity Issues and Attacks

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Dramatic Changes in Bitcoin Price Affect Liquidity

Yesterday was an extremely positive day for Bitcoin. Senator Tom Carper held a Senate Committee hearing to discuss the legal and business implications of Bitcoin’s ever-growing popularity.

Overall, the tone of the session was one of open-mindedness and desire to learn more about the digital currency. The representatives from FinCEN and the Attorney General explicitly stated that digital currency, in and of itself, is not illegal.

Related: Read our full summary of the Senate Committee hearing on Bitcoin

In response, Bitcoin’s price skyrocketed to over $900, a new all-time high. Bitcoin donned the front page of the Wall Street Journal this morning, was discussed on NPR, and made its way into every mainstream media outlet.

Then, the problems started. With increased interest and positive sentiment in Bitcoin came increased trading volume, and many trading platforms just could not handle the demand. And in response, the price of Bitcoin dropped back down to $500.

Liquidity Issues at Exchanges

Coinbase, a US-based startup, suddenly announced that it was hitting its normal buy limits and warned users that, while they could place orders, these orders would not be priced for up to 5 days. At Coinbase, investors cannot buy Bitcoin reliably. Note that Coinbase is not technically an exchange, but because of its ease-of-use and trustworthiness, many investors go to Coinbase to buy Bitcoin.

Coinbase Liquidity Buy Limits Bitcoin

Mt.Gox, a Japan-based exchange, continues to have USD withdrawal liquidity issues. At Mt.Gox, investors cannot sell Bitcoin reliably.

Bitstamp, a Slovenia-based exchange, was hit with a DDOS (denial of service) attack this morning and went down just when the price dropped and investors wanted to buy.

Bitstamp DDOS Attack Liquidity Bitcoin

Coinsetter, a relatively new trading platform, does not yet allow wire transfers from US customers and has trade minimums of 1 BTC.

Coinsetter Liquidity Issues Bitcoin

Related: Coinsetter Launches US-Based Bitcoin Forex Trading Platform

These liquidity issues are a symptom of the reality that it is still early days for Bitcoin and demand is growing incredibly fast. But the problems these exchanges have experienced also highlight the risk in being a currency speculator in Bitcoin. You may be able to buy low or sell high, but perhaps not both on the same day.

Note: Other exchanges exist that were not profiled, namely BTC China (now the largest Bitcoin exchange in the world), BTC-e, and others. Read our comparison of exchanges and Bitcoin wallets to learn more.

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