What’s the expected loss when Bitcoin is under cyberattack? A fractal process analysis

Abstract

In the era of digitalization, cryptocurrencies have become an alternative asset for both retail and institutional investors. While the emerging digital ecosystem based on blockchain technology offers numerous advantages, it is important to be aware of potential risks such as hacking incidents. In the 2011–2021 period, approximately 1.7 million units of Bitcoin were stolen due to criminal activity with losses exceeding $700 million. This paper models the distribution of stolen coins as a fractal process using power laws to estimate the expected losses from Bitcoin cyberattacks. Our results show that naïve statistics dramatically underestimate the expected loss by more than 70 percent. Our findings have important policy implications with respect to the urgent need for cryptocurrency market oversight by governments and regulatory agencies.