Modeling and Forecasting the Probability of Crypto-Exchange Closures: A Forecast Combination Approach

Said Magomedov and Dean Fantazzini

MPRA Paper from University Library of Munich, Germany

Abstract: The popularity of cryptocurrency exchanges has surged in recent years, accompanied by the proliferation of new digital platforms and tokens. However, the issue of credit risk and the reliability of crypto exchanges remain critical, highlighting the need for indicators to assess the safety of investing through these platforms. This study examines a unique, hand-collected dataset of 228 cryptocurrency exchanges operating between April 2011 and May 2024. Using various machine learning algorithms, we identify the key factors contributing to exchange shutdowns, with trading volume, exchange lifespan, and cybersecurity scores emerging as the most significant predictors. Since individual machine learning models often capture distinct data characteristics and exhibit varying error patterns, we employ a forecast combination approach by aggregating multiple predictive distributions. Specifically, we evaluate several specifications of the generalized linear pool (GLP), beta-transformed linear pool (BLP), and beta-mixture combination (BMC). Our findings reveal that the beta-transformed linear pool and the beta-mixture combination achieve the best performances, improving forecast accuracy by approximately 4.1% based on a robust H-measure, which effectively addresses the challenges of misclassification in imbalanced datasets.

Keywords: forecast combination; exchange; bitcoin; crypto assets; cryptocurrencies; credit risk; bankruptcy; default probability (search for similar items in EconPapers)
JEL-codes: C35 C51 C53 C58 G12 G17 G32 G33 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-big, nep-cmp, nep-pay and nep-rmg
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https://mpra.ub.uni-muenchen.de/123416/1/MPRA_paper_123416.pdf original version (application/pdf)

Related works:
Journal Article: Modeling and Forecasting the Probability of Crypto-Exchange Closures: A Forecast Combination Approach (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:123416

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