Cyber-Attacks, Cryptocurrencies, and Investor Protection
52 Pages Posted: 27 Oct 2020
Date Written: 2020
This paper provides comprehensive evidence on the effects of cyber-attacks and investor protection on the risk-adjusted returns and trading volumes of the three main cryptocurrencies (Bitcoin, Ethereum and Litecoin). We find that investor protection is effective against cyberattacks in most cases, especially in terms of risk-adjusted returns, except in the industry sector and cryptocurrency exchanges. Heightened investor protection is perceived as a warning signal for the upcoming cyber threat by (risk-averse) Bitcoin and Ethereum investors, who engage in more arbitrage trading to reduce their losses, which increases market efficiency and their risk-adjusted returns. On the other hand, (risk-loving) Litecoin investors expect higher protection to reduce market noise and volatility; therefore they decrease their speculative trading since they predict fewer opportunities to make risky bets, which increases their risk-adjusted returns and the probability of cyber-attacks. Further, localised cyber-attacks (e.g., hacktivism and cyber-crime) have more significant effects on cryptocurrencies compared to nationwide ones (e.g., cyber espionage and cyber warfare). Finally, cyber-attackers targeting cryptocurrency exchanges are most likely also to hit other sectors such as the industry and financial ones.
Keywords: cyber security, cyber-attacks, cryptocurrencies, return and volatility jumps
JEL Classification: C220, E400, G100
Suggested Citation: Suggested Citation