The State of Bitcoin Hacks: A Grim Overview

Between 2013 and 2017, the Bitcoin market suffered a staggering 29 hacking incidents, resulting in the theft of a whopping 1.1 million Bitcoin. Considering Bitcoin’s average price surpassing $20,000 in December 2020, we’re talking about losses that exceeded a jaw-dropping $22 billion. That’s not just pocket change; that’s enough to buy a yacht, or at least fund a lavish weekend in Vegas (until, of course, it’s all stolen again).

Crypto Exchange Responses: Upgrades and Innovations

In response to these security threats, modern crypto exchanges have stepped up their game. Approximately 90% have implemented cold storage systems, essentially putting Bitcoin in a high-tech vault far away from the prying eyes of hackers. Think of it as hiding your valuables in a bank safety deposit box instead of leaving them under your mattress. Storing assets offline significantly lowers the risk of hacking attacks. But, alas, it’s not a foolproof solution.

The Unfortunate Reality: Cybercrime’s Growth

Fast-forward to 2019, when hackers stole over $4 billion in cryptocurrency—more than double the losses of the previous year. This alarming trend casts serious doubts on the security of blockchain applications in finance. While many argue that theft can occur regardless of the payment method (hello, credit card fraud), the scale and nature of these incursions are very different—and have some important implications.

The Credit Card Comparison: Apples and Oranges

When comparing fraud in credit cards versus Bitcoin, it’s crucial to recognize the discrepancies:

• First, millions use credit cards daily whereas crypto enthusiasts are still in the minority.
• Secondly, credit card fraud frequency is higher, but the average dollar amount lost per incident tends to be lower.
• Most credit card companies offer insurance for victims, a luxury Bitcoin owners don’t have.
• Lastly, law enforcement has a better track record for handling credit card fraud than they do against cybercriminals in the murky waters of cyberspace.

Impact of Hacking on Bitcoin Market Volatility

A recent empirical study I conducted analyzed the volatility surrounding Bitcoin post-hacks, utilizing an Exponential Generalized Autoregressive Conditional Heteroskedasticity model (try saying that three times fast!). The findings showed a significant uptick in Bitcoin’s volatility right on the day of the hacking incident. But here’s the kicker: it also saw a delayed response five days later, like a bad hangover from a wild night out, reminding investors that fear never really sleeps.

How Other Cryptocurrencies Respond

Interestingly, even Ethereum (ETH), a close cousin to Bitcoin, felt the ripple effects from these hacks. Ether’s volatility also saw a delayed reaction, likely because exchanges trade various cryptocurrencies simultaneously. A hack affecting Bitcoin might easily cause traders to flee to other cryptocurrencies, thus affecting them too.

Cybeyond Risk: What’s the Financial Impact?

To understand the weighty risks of cyberattacks, our team utilized extreme value theory to show that the distribution of hacking incidents is anything but normal; it’s extremely fat-tailed, indicating that over-the-top hacking events are not only possible but expected. We calculated a “shadow mean” risk of $59.7 million when considering high-loss incidents over $1 million, far exceeding the naïve average of $12.36 million.

Conclusions and Future Directions

Ultimately, these findings imply that traditional risk management tools might falter when applied to cryptocurrency environments. As the Bitcoin world continues to evolve, so too must our strategies for securing investments and safeguarding digital assets.