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A total of 1.1 million bitcoins were stolen in the 2013-2017 period. Given that the current price of Bitcoin exceeds $ 40,000, the corresponding monetary equivalent of the losses is more than $ 44 billion, which highlights the social impact of this criminal activity. The question arises as to how the uncertainty in the Bitcoin market, measured by its volatility, responds to such cyberattacks.
A research article recently published by Dr. Klaus Grobys (University of Vaasa, Finland) in the well-known journal Quantitative finance addresses this question.
In his study, he examined 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 hackers with a subsequent increase in uncertainty between the next day (? + 1) and the fourth day (? +4) after a cyber attack took place. .
However, the study finds evidence of a late response in volatility. Specifically, the volatility of Bitcoin’s return increases substantially on the fifth day (? + 5) after a hacking incident occurred.
Is this result still strong even after controlling for immediate volatility response at the moment? = 0, which is the day the actual cyber attack took place. The delayed response of Bitcoin’s return volatility points towards inefficiency in the Bitcoin market as shocks need time to have a full price.
While previous studies documented the simultaneous movements of cryptocurrency returns, a novel finding from current research is that hacks in the Bitcoin market also affect other cryptocurrency markets.
Specifically, the evidence suggests that there is a spillover effect on volatility associated with hacking incidents. As evidenced in the Bitcoin market, does the volatility in the Ethereum market increase dramatically with a time lag? + 5. A rather surprising result is that there appears to be no evidence of a contemporaneous response to Ethereum’s volatility. However, the delayed increase in volatility of Ethereum returns exhibits practically the same economic magnitude as Bitcoin returns.
Another interesting result is that neither the returns of Bitcoin nor those of Ethereum seem to exhibit asymmetries in their volatility processes despite the fact that it is a stylized fact of traditional financial markets that volatility responds more strongly to negative innovations.
“My study is a first attempt to reveal possible risk factors and their effects on the new emerging digital financial markets; cyberattacks are just one of these new risk factors. From my point of view, much more research needs to be done on this topic, “says Dr. Klaus Grobys.
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Investigation article
Grobys, K. (2020) When the blockchain does not block: On piracy and uncertainty in the cryptocurrency market, Quantitative finance, forthcoming.
DOI: https: /
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