A total of 1.1 million Bitcoin were stolen in the 2013-2017 period. Given the current price of Bitcoin of more than $ 40,000, the corresponding monetary equivalent of losses is more than $ 44 billion, underscoring the societal impact of this criminal activity. The question arises as to how the uncertainty in the Bitcoin market – measured in terms of its volatility – reacts to such cyber attacks.

A recently published research article by Dr. Klaus Grobys (University of Vaasa, Finland) in the well-known journal Quantitative Finance deals with this question.

In his study, he examined 29 hacking incidents in the Bitcoin market in the period 2013-2017. A surprising result of this study is that Bitcoin volatility does not react to hacking and the uncertainty increases between the following day (? + 1) and the fourth day (? + 4) after a cyber attack.

However, the study finds evidence of a delayed response to volatility. In particular, the volatility of the Bitcoin return increases significantly on the fifth day (? + 5) after a hacking incident.

This result remains robust even after checking the immediate volatility reaction at the time? = 0 This is the day on which the actual cyber attack took place. The lagged response of Bitcoin yield volatility indicates inefficiency in the Bitcoin market as shocks take time to be fully priced in.

While previous studies documented the simultaneous movement of cryptocurrency returns, a novel finding in current research is that hacking in the Bitcoin market affects other cryptocurrency markets as well.

In particular, the evidence suggests that the volatility associated with hacking incidents has a contagious effect. As shown in the Bitcoin market, the volatility in the Ethereum market increases dramatically with a time lag. + 5. A rather surprising finding is that there doesn’t seem to be any evidence of a simultaneous reaction to Ethereum’s volatility. However, the lagged rise in volatility in Ethereum returns has practically the same economic magnitude as it does in Bitcoin returns.

Another interesting finding is that neither Bitcoin returns nor Ethereum returns show asymmetries in their volatility processes, although it is a stylized fact of traditional financial markets that volatility is more responsive to negative innovations.

“My study is a first attempt to uncover potential risk factors and their effects on the emerging digital financial markets. Cyber ​​attacks are just one of these new risk factors. In my view, a lot more research needs to be done on this topic.” says Dr. Klaus Grobys.


Research article

Grobys, K. (2020) When the Blockchain Doesn’t Block: About Hackings and Uncertainties in the Cryptocurrency Market, Quantitative Finance, appears.

DOI: https://doi.org/10.1080/14697688.2020.1849779

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