Cyber-attacks, cryptocurrencies, and cyber-security

Abstract

This chapter provides comprehensive evidence on the effects of cyber-attacks (cyber-crime, cyber espionage, cyber warfare and hacktivism) and cyber security on three types of cryptocurrencies (Bitcoin, Ethereum and Litecoin). Our methodology is based on time series regressions using cyber-attack data; for the analysis, we consider realised returns, realised volatilities, trading volumes and risk-adjusted returns. Stronger cyber security is found to increase realised and risk-adjusted returns, to reduce risk and to increase trading volumes as investors build up their confidence to trade in a safer digital environment. Ethereum, which is a smart contract, benefits the most from cyber security. Bitcoin and Litecoin investors can be characterised as risk-loving and overreact in their attempt to exploit arbitrage opportunities in the event of cyber-attacks targeting cryptocurrency exchanges and industry sector; this type of behaviour is attenuated (intensified) by stronger cyber security in the case of the former (latter) type of attacks. On the other hand, Bitcoin investors in particular become risk-averse when cyber-attacks hit the US government sector. Ethereum is relatively more immune to cyber-attacks regardless of their targets and types in comparison to Bitcoin and Litecoin. However, hacktivism increases risk for all three cryptocurrencies considered. Our results suggest that policy makers and regulators need to be better informed about the impact of cyber-attacks on cryptocurrencies and that more appropriate strategies should be designed and put in place to enhance cyber security.