On the Tail Risk of Cyberattacks in the Bitcoin Market

Abstract

In the era of digitalization, cryptocurrencies have become an alternative asset for both retail and institutional investors. While the new emerging digital ecosystem based on blockchain technology has been praised for offering plenty of advantages such as decentralization, discretion or increased efficiency in terms of faster settlements among others, investors need to be aware of new types of risks such as hacking incidents. In the 2011-2018 period, about 1.7 million unit of Bitcoin have been stolen corresponding to losses accumulating more than $655 million highlighting the societal impact of this criminal activity. The novel aspect of our study is that it employs a recently proposed approach related to Extreme-Value-Theory to compute the quantity of the risk of cyberattacks. Our results show that employing naïve statistics in risk management dramatically underestimates this risk. We argue that our findings have important implications for policy makers as they call for an urgent need for cryptocurrency market regulations from governments and regulatory agencies to protect investors.

Keywords: Bitcoin, Cryptocurrency, Cyberattacks, Financial technology, Extreme-Value-Theory, Dual distribution, Hacking incidents

JEL Classification: C19, C49, C59, G10, G15, G19