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The impact of Bitcoin hacking incidents in the crypto market

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In the 2013–2017 period, 29 hacks occurred in the Bitcoin market where a total of 1.1 million Bitcoin were stolen. Noting that the average price for Bitcoin (BTC) in December 2020 exceeded $20,000, the corresponding monetary equivalent of losses is more than $22 billion, which strongly highlights the societal impact of this criminal activity.

What did crypto exchanges do to address this problem? Nowadays, about 90% of exchanges use some kind of cold storage system, which means that digital assets are stored offline. Keeping Bitcoin offline considerably reduces the threat from hacking attacks.

Related: Roundup of crypto hacks, exploits and heists in 2020

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Nevertheless, Jean Baptiste Su, principal analyst and technology futurist at Atherton Technology Research, highlights that in 2019, hackers stole over $4 billion, which was more than twice as much as in 2018. In fact, cyberattacks are a very serious issue that cast doubts on the security of modern blockchain-based applications in the financial industry. Of course, one can argue that thefts also occur when using traditional payment methods, such as credit cards. For instance, the Annual Fraud Statistics released by The Nilson Report documents that credit card fraud losses worldwide reached $27.85 billion in 2018.

Related: Crypto exchange hacks in review

I think it is important to point out that fraud in the market for credit cards as opposed to fraud in the cryptocurrency market are difficult to compare for at least four reasons:

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  • First, many more people use credit cards as opposed to cryptocurrency.
  • Second, although the frequency of fraud in the market for credit cards is considerably higher, the average amount of stolen monetary equivalent per fraud is dramatically lower.
  • Third, it is much more likely that credit card owners are insured by the credit card company, whereas Bitcoin users typically do not have such insurance.
  • Finally, it is much more probable that the police have some chances of successfully dealing with credit card losses compared to Bitcoin thefts in cyberspace.

Hacking effects on the crypto market

To explore the question of how Bitcoin hacking incidents affect uncertainty in the overall Bitcoin market, I conducted an empirical study where I analyzed how the volatility — which is in financial economics a measure of an asset’s uncertainty — responds to hacking incidents. To do so, I used a so-called Exponential Generalized Autoregressive Conditional Heteroskedasticity model where I included binary dummy variables in the variance equation. The dummy variables measured the impact on the volatility up to five days after a hacking incident in the Bitcoin market.

In my study, I found that Bitcoin’s uncertainty in terms of volatility significantly increases. Surprisingly, I found two effects — a contemporaneous effect and a delayed effect. The volatility increases on the day of the hacking incident and then drops down to normal levels again. There is no effect between day one and day four. Then, on the fifth day after the hacking, the volatility substantially increases again. Since there are no other events that took place, the effect is most likely caused by the same hacking incident.

A possible explanation for the delayed effect could be that hacking incidents are more likely to occur at small exchanges that probably exhibit a lower level of security standards compared to larger exchanges. As a consequence, information diffusion occurs more slowly.

Another interesting finding of the study is that even other cryptocurrencies, such as Ether (ETH), do respond to hacks in the Bitcoin market. Interestingly, the volatility of Ether exhibits only a delayed effect. There is no contemporaneous effect. However, the delayed increase in volatility on day five is virtually the same as we observed for Bitcoin’s volatility.

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A possible explanation for this finding could be that exchanges trade multiple cryptocurrencies at the same time, and if an exchange was hacked, thieves could steal both Bitcoin and Ether, which could be a possible explanation for volatility spillovers found in my study. Another possible explanation for this phenomenon could be that thieves are using one cryptocurrency to cash out on their theft of the other, thus shifting the demand for cryptocurrencies from Bitcoin to Ether, for instance.

What is the risk of a cyberattack in terms of the U.S. dollar?

To explore this issue, I collaborated with colleagues from the Finance Research Group and the Mathematics Research Group at the University of Vaasa. Together with Niranjan Sapkota and Josephine Dufitinema, we collected 53 hacking incidents in the Bitcoin market totaling in the 2011–2018 period corresponding to 1.7 million stolen Bitcoin. We argue that naïve risk management may dramatically underestimate the risk of those hacking incidents and that naïve risk management may dramatically underestimate the risk of those hackings incidents.

In the study, we show that the distribution of hacking incidents is extremely fat-tailed. This means that Black-Swan-like events are more likely to occur. We found that the probability distribution of hacking incidents does not have a theoretical mean, which implies that the mean of the loss distribution is infinite. To compute an estimate of the risk due to cyberattacks in the Bitcoin market, we then employed recently proposed tools from extreme value theory, or EVT.

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We showed that the shadow mean of the expected risk of cyberattacks is $59.70 million, which is definitely larger (almost two times) than the corresponding sample tail mean of $30.92 million. More specifically, the shadow mean is computed by an application of ETV and corresponds in our research context to the expected risk of cyberattacks above a certain threshold. In our study, we chose as a threshold a loss of $1 million. That means all losses due to cyberattacks that are above $1 million are treated as extreme values.

The next step in our calculation was to combine the shadow mean with the expectation of the loss distribution where we collected all losses due to cyberattacks that are less than $1 million. Combining our shadow mean with the sample mean below our chosen threshold, we calculated an overall expected loss of $24.89 million instead of $12.36 million, which is the naïve sample mean of the hacking incident data.

Our findings have significant implications. For instance, our results show that standard tools used in traditional risk management can perhaps not be relied upon for making decisions.

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Terra prepares to burn more than 9% of LUNA’s total supply

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Burning nearly 90 million LUNA tokens into the community pool can put an upward pressure on the native token’s price.

Do Kwon, co-founder and CEO of Terraform Labs, the South Korean company behind the blockchain project Terra (LUNA), recently announced on Twitter that on-chain voting for project 44’s proposal will begin on Wednesday. ).

The proposal to start burning 88,675,000 LUNA from the community pool to mint 3 – 4 billion UST will reduce the total supply of native token by more than 9%.

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TVL on Earth reached ATH

After the integration of the IBC protocol last week and the launch of Wormhole V2 support for Terra, the total blocked value (TVL) in protocols on the network has reached a new high.

Last week, TVL on Earth reached $10.22 billion, with the Anchor, Lido, Mirror and Terraswap protocols accounting for more than 90% of the amount, according to data from DeFi Llama.

Currently, at US$9.97 billion, Terra is ranked as the fourth blockchain with the largest TVL, following Ethereum, Binance Smart Chain and Solana.

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New Bitcoin ETF Offers Shorting Bitcoin Futures, Creators Warn of Multiple Risks

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Direxion has filed for a Bitcoin ETF that allows traders to short BTC futures contracts

According to an article by Bloomberg, a new Bitcoin ETF, if approved, will enable traders to short Bitcoin futures. The filing was submitted on Tuesday, Oct. 26.

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Direxion wants to launch Bitcoin futures ETF for short-sellers

Bloomberg has written that, on Oct. 26, Direxion submitted documentation to launch the Direxion Bitcoin Strategy Bear ETF. Last week, two ETFs that track the performance of Bitcoin futures were launched by ProShares and Valkyrie.

Now, the BTC futures ETF industry in the U.S. may reach a new milestone—if the launch of the ETF for bears is approved by the U.S. Securities and Exchange Commission.

The debut of Bitcoin futures products last week prompted Bitcoin growth to almost $67,000 and a new all-time high.

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However, today, the flagship cryptocurrency retreated below the $60,000 level as a mind-blowing half-a-million worth of liquidations were conducted across major exchanges: Binance, Bitfinex, OKEx, Huobi and so on.

Slightly over $500 million worth of those crypto liquidations were long positions.

BITO ETF gains $1 billion in just two days

ProShares Bitcoin ETF last week became the second-most-traded asset on the NYSE on its first day of trading. Buy orders to the tune of 10,100 were placed on BITO (the ticker the ETF goes by), and seven times more orders were placed to sell it.

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After trading for two days, BITO reached $1 billion in net asset value. That is the equivalent of the net asset value of several Canadian Bitcoin ETFs that have been trading for a while already.

Direxion fund bears lots of risks

The new Bitcoin ETF filed for by Direxion bears numerous financial risks for short-sellers, the company warns. Trading this ETF may lead to shorters getting wiped out, Bloomberg writes, and Bitcoin’s massive price swings would be a problem here, too.

The SEC filing states that if you are not prepared to lose all your funds by investing in this ETF, you should not bet on it.

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This week, some in the crypto community also expect another Bitcoin futures ETF to kick off—the one filed for by the VanEck asset manager.

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Blockstream is sponsoring this tech for scaling Bitcoin [BTC]

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Major blockchain technology company, Blockstream has announced its sponsorship of work on Federated E-Cash. For the uninitiated, David Chaum was the man behind the concept of E-Cash that predates Bitcoin.

E-Cash Federation, on the other hand, is an entity that comprises of independent members assembled to develop a multi-sig wallet for the purpose of being a “blind, distributed custodian by acting as an e-cash mint.”

One of the main factors that have impeded Bitcoin’s adoption is scalability. On that note, Adam Back-led Blockstream has made significant strides. Even as scaling solutions like the Lightning network and federated sidechains have paved the way for large-scale adoption of the crypto-asset, they are yet to see substantial growth. Here come Federated blind mints, which the tech firm believes are a “natural complement to the existing scaling solutions.”

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Blockstream’s tryst about Bitcoin scaling

Blockstream stated that Federated E-Cash can help scale Bitcoin. It cited an innovative exciting possibility of integrating LN into federated mints. This, in turn, would make them interoperable with each other and the broader space. It further stated,

“One could imagine the emergence of community-run federations, where users have a natural trust in the federation members, which isn’t the case with traditional custodians. For the larger number of Bitcoin users who rely on custodial wallets to store their bitcoin, switching to an E-Cash Federation, reduces the trust profile and increases the privacy guarantee for these users.”

Blockstream is looking at an experimental project of a Federated E-Cash scheme dubbed MiniMint that is currently under development.

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$16M Funds for Bitcoin mining STO

The latest news comes a week after Blockstream announced raising $16 million funds in the sixth tranche of its BTC mining-focused security token [STO], called the ‘Blockstream Mining Note [BMN].’ This marked the rapidly rising interest from individual and institutional investors.

It was in March 2021 when Blockstream formally unveiled its BMN security token. Its offering essentially facilitated non-United States investors with an alternative to mine Bitcoin or invest in BTC mining stocks mining BTC with the help of BMN’s associated hash rate. Additionally, it was issued on Bitcoin’s Liquid sidechain with each BMN Series 1 granting market players up to 2k Tera hashes per second of BTC mined at the Canadian blockchain technology company’s enterprise-grade mining facilities.

Besides, Blockstream is also gearing up to list its BMN security token on Bitfinex Securities, which happens to be a relatively new STO platform by Bitfinex.

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Blockstream’s tryst about Bitcoin scaling

Blockstream stated that Federated E-Cash can help scale Bitcoin. It cited an innovative exciting possibility of integrating LN into federated mints. This, in turn, would make them interoperable with each other and the broader space. It further stated,

“One could imagine the emergence of community-run federations, where users have a natural trust in the federation members, which isn’t the case with traditional custodians. For the larger number of Bitcoin users who rely on custodial wallets to store their bitcoin, switching to an E-Cash Federation, reduces the trust profile and increases the privacy guarantee for these users.”

Blockstream is looking at an experimental project of a Federated E-Cash scheme dubbed MiniMint that is currently under development.

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