The real question is whether Bitstamp is now insolvent. They lost $5 million. Did they get new funding to replace that, have enough capital of their own, or are they dipping into customer funds? Their statements have carefully avoided mentioning this issue.
If a real stockbroker lost funds like that, and became insolvent (debts > assets), they would have to stop operations immediately. In some jurisdictions it is a felony for a broker to continue to accept funds once insolvent. They don't get to "fix it later". That's because, historically, the temptation to fix it by speculating with customer funds has been a big problem.
Bitstamp now needs a full audit by an outside auditing firm.
So Bitfinex, pretty similar volume to Bitstamp, reports about 200m in volume in the past 30 days. A run rate of 2.4b.
Their fees are roughly 0.4% on a transaction. But note, the fees are incurred twice per unit of volume. i.e. they pair a buyer and a seller, who both pay a fee, thus you get a 0.8% fee on any unit of volume.
So we end up with a very rough revenue of $20m a year. Of course there will be various costs, but I've seen most exchanges run with teams of 6 core people, with another 6 or so support staff. I wouldn't expect to see much larger teams than 20 at Bitstamp, and given their cost-center for development is in Slovenia, I doubt you'll see them average more than $150k, which would be $3m per year.
So, together with $10m in funding not so long ago, together with substantial revenues ($10-20m per year), and together with the fact it's quite likely we're talking about early adopters (Company was founded in 2011, the year of 30 cent bitcoins, 1000x cheaper) who likely could pay this out of their own pockets, do they have what it takes to cover $5m? I think so. On that last point, if they had $5k of bitcoin when they founded the company, that'd be worth $5m today, and over $15m a year ago, for perspective. It's not at all unlikely they're sitting on $30m, but rather build a company where they offload their entire risk and give up 30% of equity. Who knows.
Does that mean an audit isn't necessary, not at all. It should be standard practice. Just speculating here on whether I think an audit would show a positive result or not, I think it would.
Agreed. Unless a tier 1 accounting firm (Deloitte, PwC, etc) comes in and audits their books, I wouldn't touch them with a 10 foot pole. Bitstamp is large enough and has been in business long enough that they may indeed have been able to absorb this loss. If that's actually the case though, then they should have no problem proving it. On top of that, the publicly released audit results would be a huge marketing tool for them.
The fact that they didn't do something like this and release it along with this statement makes me rather suspicious. It's not like they don't know that this is the first question on every single customer's mind.
An outside security audit wouldn't hurt either as they've lost the benefit of the doubt on that point now and their mentioned list of security improvements is all very hand-wavey.
Bitcoin exchanges aren't very profitable. The numbers for Mt. Gox are available now. [http://www.businessinsider.com/mt-gox-financials-2014-2] The numbers for 2013 are actuals; the future-year numbers were pure fantasy. For the year ending March 31, 2013, Mt. Gox, the biggest Bitcoin exchange in the world at the time, made $286,000. That's all. For comparison, the average profit for a single McDonald's location is about $200,000.
The Bitcoin exchange business has low commissions, and they're heavily discounted for big traders. Sometimes all the way to zero. It's hard for an exchange to raise prices. So exchanges tend to look for other ways to make money. Those ways usually aren't good for customers. Trading on one's own exchange and front-running are tempting. Mt. Gox probably did that; many users observed that, during busy periods, trades did not appear to be first in, first out.
That's why no major financial firm has entered the Bitcoin exchange business. It's not very profitable.
They generated $1.3m in revenues in a year with a 20% growth rate.Their growth rate was for 2013? 400%+, putting them at a runrate of about $5.5m at the start of 2014.
And the amount of bitcoin transactions has only grown since 2013. e.g. the record highest number happened just yesterday. Or compare wallets at the top bitcoin company right now which verifies users and bank accounts, Coinbase, which was at 700k wallets this time last year, now at roughly 2 million. Another 300 million of VC money was invested since 2013 into the bitcoin space.
I mostly agree on your larger point regardless, big traders get discounted (any source for that from any particular bitcoin exchange, btw?) and exchanges are definitely not gold mines right now. Look at Vault of Satoshi, just closed. It ran well but it just wasn't bringing in the type of revenue they could with the amount of expertise they had on board. They've switched focus to a Netflix app. But comparing 2012 Mt. Gox to 2014 says quite little, we're talking about a trainwreck of a company here in an industry that's seen 1, almost 2 orders of magnitude growth since 2012. If price is a good proxy (not really great, but sorta ok), the fiscal year in which Mt. Gox made the $1.3m revenue / $300k profit started with a bitcoin price of less than $5, for perspective. Things have grown somewhat since then.
I appreciate that Bitstamp made a statement, but anyone who trusts this is a complete fool. Trusting Mt. Gox was precisely how I lost money in its demise.
I was also called a complete fool by someone on HN just before I lost my money. The comment made me angry. Me, a fool? Yet it was true, and I should have listened.
Run away, don't walk. They lost 5 million dollars. Let that sink in before deciding to trust them with any money you care about.
5 million dollars is about the same as a Series A round. They lost the equivalent of an entire company of programmers. You could employ 50 programmers for one year with that amount of cash. And it was precisely your money that they lost.
For all you know, this could now be a game of "musical chairs" where the last person to withdraw money from bitstamp will be left wanting. Don't let that be you. Guard yourself.
By the way, Mt. Gox lied through their teeth to me, all the way up until their service shut off. Leading up to the disaster, I was in constant communication with their support staff, and they were very reassuring. "No, of course no one will lose money. Withdraws will reopen soon." Too bad the support people were themselves being lied to by Mt. Gox management.
So, no, a statement by a bitcoin service isn't worth the weight of the paper it's printed on.
EDIT: It's distressing that HN downvoted the parent comment to the point where they felt like deleting it. Please try to downvote less in general. The parent comment was simply relaying Bitstamp's statement.
As I read it, that's a promise to users, not a statement about their balance sheet. It does not preclude the situation 'Animats is talking about, where they currently have less BTC than they credit their customers with, but they plan to make it up somehow before it becomes a problem.
That doesn't formally answer the question, though the fact that they will respect all withdrawals does suggest that they are unlikely to be insolvent. For example, they could be insolvent but allow withdrawals up to the last 19k bitcoins.
I don't mean to suggest that they are not solvent; I am only pointing out that the language doesn't seem to perfectly answer the question.
Honestly, to all in long Bitcoin investors 5 million USD is practically chump change.
Real talk.
Simply put, it's pretty much assumed based on volumes and fees that they make that much profit anyway, but there are also things such as recapitalization.
5 million is not a nail in a coffin for a Bitcoin exchange.
Lastly and honestly, if these assumptions are wrong then assuming Bitstamp wants to continue business it would be easy to raise the money on slightly less favorable terms given the distress/desperation (assuming the previous assumptions prove false).
Unless you're speaking as a founder in the field, I'm finding this hard to believe. Five million dollars is about an entire Series A round. Or at least half of one. And a Series A round is supposed to last multiple years. Or at least a whole year. It's not chump change.
And I've heard you're going to have no luck raising money at all if investors catch wind that you need it to survive. "Slightly less favorable terms" probably means the deal doesn't happen. See e.g. http://paulgraham.com/pinch.html
But I have no experience at that, so I admit I'm going off of hypotheticals and what other people say.
EDIT: Also, that's five million dollars at current BTC prices. Bitcoin has only recently fallen to $300/coin. It was $600/coin not to long ago.
If a real stockbroker lost funds like that, and became insolvent (debts > assets), they would have to stop operations immediately. In some jurisdictions it is a felony for a broker to continue to accept funds once insolvent. They don't get to "fix it later". That's because, historically, the temptation to fix it by speculating with customer funds has been a big problem.
Bitstamp now needs a full audit by an outside auditing firm.