Cyber-attacks risk Bitcoin’s portfolio diversification potential

Cryptocurrencies represent a significant shift in the world of finance. The case of Bitcoin, the world’s largest cryptocurrency, is an example as, over the years, it has found its strength as a long-term investment vehicle and a store of value. During the course of its decade-long existence, the crypto-ecosystem has also been at the end of cyber-attacks and has had to focus on making it more robust in order to not lose out on users and investors.

Interestingly, the impact of cyber-attacks on prominent cryptocurrencies is likely to also provide greater insight into the nuances of the crypto-market.

A recent research paper titled “Cyber Attacks, Spillovers, and Contagion in the Cryptocurrency Markets,” tried to understand the situations in which volatility spillovers happen between cryptocurrencies like Bitcoin, Litecoin, and Ethereum, while also expanding on to what degree cyber-attacks play a role in it.

The paper argued that there are interdependencies that occur during cyber-attacks and that ‘spillover parameters’ are influenced by it. It also noted that cyber-attacks do play a role in strengthening cross-market linkages.

For most stakeholders and investors, portfolio diversification remains a crucial characteristic when it comes to the crypto-market and most traders believe cryptocurrencies like Bitcoin do provide substantial gains, enable a diverse portfolio, and help in reducing risk. The paper argued,

“Understanding the linkages between cryptocurrencies is crucial for risk management, portfolio diversification, hedging, and arbitrage purposes. In particular, investors need to understand the degree of contagion risk they are exposed to when trading cryptocurrencies.”

Data analyzed also suggested that when it comes to correlation, the crypto-market notes high correlations within itself, but not with other asset classes, something that in turn, helps it act as a good hedging option.

Source: CoinMetrics

Interestingly, market data provided by CoinMetrics showed an increasing correlation between Ethereum, Litecoin, and Bitcoin all throughout the duration of the past year.

According to the study, in such a scenario for many investors, the ultimate impact has been regarding reduced portfolio diversification and that cyber-attacks within the crypto ecosystem are invariably linked to it. It noted,

“Despite some differences associated with the number of attacks per day, their type and target, in general cyber attacks appear to strengthen cross-market linkages, thereby reducing portfolio diversification opportunities for cryptocurrency investors.”