How uncertainty in the Bitcoin market responds to cyber attacks

A researcher at the University of Vaasa, Klaus Grobys, is investigating how the uncertainty in the Bitcoin market reacts if Bitcoin is exposed to hacking incidents – or so-called cyber attacks. The study finds two effects on Bitcoin volatility – an immediate effect and a delayed effect. The proposed model could potentially serve as a tool for investors active in the cryptocurrency derivatives market.

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

A recently published research article from Dr. Klaus Grobys in the well-known magazine Quantitative economics solves this question.

In his investigation, he investigated 29 hacking incidents that occurred in the Bitcoin market in the period 2013–2017. A surprising result of this study is that Bitcoin volatility does not respond to hacking with a subsequent increase in uncertainty between the subsequent day (𝑡 + 1) and the fourth day (𝑡 + 4) after a cyber attack took place.

However, the study finds evidence of a delayed response in volatility. Specifically, Bitcoin return volatility increases significantly on the fifth day (𝑡 + 5) after a hacking event occurred.

This result remains robust, even after checking the instantaneous volatility response at time 𝑡 = 0, which is the day the actual cyber attack took place. The delayed response to Bitcoin return volatility points to inefficiencies in the Bitcoin market as shocks need time to be fully priced.

While previous studies documented cow movements of cryptocurrency returns, a new finding of current research is that hackings in the Bitcoin market are also affecting other cryptocurrency markets.

Specifically, the evidence suggests that there is an infectious effect in volatility associated with hacking incidents. As shown by the Bitcoin market, the volatility of the Ethereum market increases dramatically with a time delay of time 𝑡 + 5. A rather surprising result is that there does not seem to be any evidence of a simultaneous response in Ethereum’s volatility. However, the delayed increase in volatility for Ethereum returns shows almost the same economic magnitude as for Bitcoin returns.

Another interesting result is that neither Bitcoin returns nor Ethereum returns appear to exhibit asymmetries in their volatility processes, although it is a stylized fact in traditional financial markets that volatility responds more strongly to negative innovations.

“My study is a first attempt to uncover potential risk factors and their effects on the new digital financial markets – cyber attacks are just one of these new risk factors. From my point of view, much more needs to be researched on this issue, ”says Dr. Klaus Grobys.

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

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