During the period 2013-2017, a total of 29 Bitcoin markets penetrated, of which 1.1 million Bitcoins were stolen. Noting that the average price of Bitcoin (BTC) in December 2020 exceeded US$20,000, and the corresponding loss of equivalent currency exceeded US$22 billion, which strongly emphasized the social impact of this criminal activity.
To solve this problem, what did the cryptocurrency exchange do? Currently, about 90% of exchanges use some type of cold storage system, which means that digital assets can be stored offline. Keeping Bitcoin offline greatly reduces the risk of hacker attacks.
However, Jean Baptiste Sow, a senior analyst and technical futurist at Atherton Technology Research, pointed out that in 2019, hackers stole more than $4 billion, more than double the amount in 2018. In fact, the seriousness of cyber attacks has caused people to doubt the security of modern blockchain-based applications in the financial industry. Of course, it can be said that theft also occurs when using traditional payment methods such as credit cards. For example, the annual fraud statistics released by the Nielsen Report show that the global credit card fraud in 2018 caused losses of US$27.85 billion.
I think it must be pointed out that it is difficult to compare credit card fraud to cryptocurrency market fraud for at least four reasons.
First, many people use credit cards instead of cryptocurrencies.
Second, although the frequency of fraud in the credit card market is much higher, the average cash equivalent stolen by fraud is much lower.
Third, credit card holders are more likely to be insured by credit card companies, while Bitcoin users usually do not have such insurance.
Finally, law enforcement agencies may have the opportunity to successfully deal with credit card losses and Bitcoin theft in cyberspace.
The impact of hacking on the cryptocurrency market
In order to explore how the Bitcoin hacking event affects the uncertainty of the entire Bitcoin market, I conducted a pilot study in which I analyzed volatility (a measure of asset uncertainty in financial economics) How to respond to hacking incidents. To this end, I used the so-called exponential generalized conditional automatic covariance model, in which binary dummy variables are included in the variance equation. The dummy variable measures the impact on volatility within five days after the Bitcoin market was hacked.
In my research, I found that the uncertainty of Bitcoin’s volatility increases exponentially. Surprisingly, I found two kinds of influence-contemporary and later. The volatility on the day of the hack increased and then fell back to normal levels. There is no effect between the first day and the fourth day. Then, on the fifth day after the breakthrough, volatility rose sharply again. Since no other incident occurred, the cause may be the same as the hacking incident.
One possible explanation for the delay effect is that hacking incidents are more likely to occur in small exchanges, which are less secure than large exchanges. As a result, the spread of information is slow.
Another interesting finding of the study is that even other cryptocurrencies, such as Ether (ETH), are responding to the penetration of the Bitcoin market. Interestingly, the volatility of ether only showed a late effect. There is no contemporary influence. However, the increase in volatility at the end of the fifth day is almost the same as the Bitcoin volatility we have seen.
One possible explanation for this discovery is that the exchange trades multiple cryptocurrencies at the same time. If the exchange is hacked, the thieves may steal Bitcoin and Ether, which may be an indication of the volatility found. In my study. Another possible explanation for this phenomenon may be that thieves are using one cryptocurrency to withdraw money from the theft of another currency, thereby shifting the demand for cryptocurrency from Bitcoin to Ether.
What is the risk of a cyber attack on the dollar?
In order to explore this issue, I contacted