Thursday, June 19, 2014

An Analysis of Bit Coins

 I needed to get the math out of the way because the prejudice today is to analyze payment systems using risk as the primary filter.  The math back there described a method for analyzing operational risk. Now we can look at the operational risk of virtual currency and bit coins in particular in a meaningful way. 

Operational risk is a single creature in the risk zoo of payment systems. The other major risks are:

·         Liquidity
·         Credit
·         Legal
·         Systemic
·         Other non-traditional risks I will talk about in future blogs

Diagram 12 shows a bit coin payment hub.

Diagram 12 Bit Coin Payment Hub

There are two operational elements raising concerns. First the broker sets the controls for access to the wallet data store. Human beings show little restraint accessing asset data stores in payment hubs if the controls exist only within the internal process. Second back pressure building up from a 10 minute update ensures that people cannot measure the value within the data store precisely at an instant of time.

Next Blog: More analysis of bit coin risks or response to comments or other payment hub phenomena 

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