Uncertainty in the Bitcoin market is how it responds to cyberattacks

Klaus Grobys, a researcher at the University of Vaasa, examines how uncertainty in the Bitcoin market reacts to Bitcoin hacking – or cyberattacks. The study finds two effects on Bitcoin volatility – immediate effects and delayed effects. The proposed model could potentially be a tool for investors active in the derivatives market for cryptocurrencies.

A total of 1.1 million bitcoins were stolen between 2013 and 2017. Given that the current price for Bitcoin exceeds $ 40,000, the monetary equivalent of the loss is more than $ 44 billion, highlighting the public impact of this criminal activity. The question is whether the uncertainty in the Bitcoin market is measured by volatility – how it responds to such cyberattacks.

Dr. A recent research article by Klaus Grobys in a popular magazine Quantitative finance answers this question.

In his study, he investigated 29 hacking incidents that occurred in the Bitcoin market between 2013 and 2017. A surprising result of this study is that the Bitcoin surge did not respond to hacks, with increasing uncertainty between the day after the cyber attack ( + 1) and the fourth day ( + 4).

However, research finds evidence of a delayed response to variability. Specifically, Bitcoin return volatility increases significantly ( + 5) on the fifth day after a hack event occurs.

This result remains strong even after = 0, the day of the actual cyber attack, immediately after managing the volatile reaction. The delayed response to the volatility that Bitcoin has returned to leads to ineffectiveness in the Bitcoin market, as it takes time for shocks to set in full.

While previous research has documented the combined actions of cryptocurrency revenues, a new result of the current study is that hacks in the Bitcoin market are also affecting other cryptocurrency markets.

Specifically, the evidence suggests that there was an infectious effect on the volatility associated with the hack incidents. As evidenced in the Bitcoin market, the volatility in the Ethereum market increases sharply over time with a delay of + 5. A very surprising result is that there is no evidence for a contemporary response to Ethereum’s volatility. However, the delayed volatility growth for Ethereum revenues indicates the same economic magnitude as Bitcoin revenues.

Another interesting finding is that while it is a stylized fact that traditional financial markets respond more strongly to volatility, neither Bitcoin nor Ethereum revenues show asymmetry in volatility processes.

“My research is the first attempt to identify potential risk factors and their impact on emerging digital financial markets – cyberattacks are just one of those new risk factors. From my point of view, more research is needed on this issue, “said Dr. Klaus Grobys.

Reference: “When the blockchain does not block: about hacking and uncertainty in the cryptocurrency market” Klaus Grobys, February 5, 2021, Quantitative finance.
DOI: 10.1080 / 14697688.2020.1849779

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