Between 2013 and 2017, there were 29 penetrations into the bitcoin market, in which 1.1 million bitcoins were stolen. Noting that the average bitcoin (BTC) price in December 2020 exceeded $ 20,000, the cash equivalent corresponding to the loss is over $ 22 billion, which convincingly underlines the impact of this criminal activity on society.
What has the cryptocurrency exchange done to solve this problem? Today, about 90% of exchanges use some type of cold storage system, which means digital assets are stored offline. Keeping bitcoins offline significantly reduces the risk of hacker attacks.
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However, Yang Baptiste Sow, senior analyst and technology futurist at Atherton Technology Research, notes that hackers stole more than $ 4 billion in 2019, more than double the amount in 2018. In fact, cyberattacks are the question. Very dangerous. On the security of modern blockchain-based applications in the financial industry. Of course, theft can be said to happen when using traditional payment methods such as credit cards. For example, the annual fraud statistics published in the Nelson Report state that in 2018, the volume of credit card fraud worldwide reached $ 27.85 billion.
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I think it’s important to note that credit card fraud, rather than cryptocurrency fraud, is difficult to compare for at least four reasons:
First, many people use more credit cards instead of cryptocurrency.
Second, while the frequency of fraud in the credit card market is much higher, the average equivalent of stolen money per fraud is significantly lower.
Third, credit card holders are more likely to be insured by a credit card company, while Bitcoin users usually do not have such insurance.
Finally, the police are likely to have some ability to deal successfully with credit card losses versus stealing bitcoins in cyberspace.
Consequences of hacking on the cryptocurrency market
To explore how bitcoin hack events affect uncertainty in the overall bitcoin market, I conducted a pilot study in which I analyzed how volatility, which is a measure of internal uncertainty in the financial economy, responds to hacking events. To do this, I used the so-called exponential generalized conditional self-variance model, in which I included binary dummy variables in the variance equation. The dummy variables measured the impact on volatility for five days after the Bitcoin market hack.
In my research, I found that Bitcoin’s uncertainty about volatility increases dramatically. Surprisingly, I found two effects – the simultaneous effect and the delayed effect. On the day of the hack, volatility increases and then returns to normal. There is no effect between the first and fourth day. Then, on the fifth day after the breakout, volatility rises significantly again. Since no other incidents have occurred, the reason is most likely the same as the burglary incident.
A possible explanation for the lag effect could be that piracy incidents are more likely to occur on smaller exchanges, which are likely to have lower security standards than larger exchanges. As a result, information dissemination is slower.
Another interesting finding from the study is that even other cryptocurrencies such as Ether (ETH) are responding to the hacking of the bitcoin market. Interestingly, the ether volatility shows only a late effect. There is no simultaneous effect. However, the delayed increase in volatility on the fifth day is almost the same as what we observed for bitcoin volatility.
One possible explanation for this discovery could be that exchanges trade multiple cryptocurrencies at the same time, and if the exchange is hacked, thieves can steal both Bitcoin and Ether, which could be a possible explanation for the volatility outliers found in my research. Another possible explanation for this phenomenon could be that thieves use one cryptocurrency to make money by stealing another currency, and for example, the demand for cryptocurrencies is shifting from bitcoin to ether.
What are the risks of a cyber attack on the US dollar?
To investigate this problem, I collaborated with colleagues from the Financial Research Group and the Mathematical Research Group at Vaasa University. Together with Niranjan Sapkota and Josephine Dufitinema, we have collected a total of 53 incidents of piracy in the bitcoin market over the period 2011-2018, which is equivalent to 1.7 million bitcoins stolen.