Cyber-Attacks, Cryptocurrencies, and Investor Protection

52 Pages Posted: 27 Oct 2020

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Woo-Young Kang

Brunel University London - Department of Economics and Finance

Fabio Spagnolo

Brunel University London - Economics and Finance

Nicola Spagnolo

Brunel University London - Economics and Finance

Date Written: 2020

Abstract

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

Caporale, Guglielmo Maria and Kang, Woo-Young and Spagnolo, Fabio and Spagnolo, Nicola, Cyber-Attacks, Cryptocurrencies, and Investor Protection (2020). CESifo Working Paper No. 8124, Available at SSRN: https://ssrn.com/abstract=3545721

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Woo-Young Kang

Brunel University London - Department of Economics and Finance ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Fabio Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 816383 (Phone)
+44 1895 203303 (Fax)

HOME PAGE: http://www.brunel.ac.uk/depts/ecf/Staff/SpagnoloF/Main.htm

Nicola Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom

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