The relationship between terrorist attacks and cryptocurrency returns

Abstract

ABSTRACT Complementing increasing concerns that cryptocurrency could be used to finance terror networks, in this paper we investigate the effect of monthly terrorist attacks outcomes – success, injuries, and fatalities – on monthly returns of 1,178 cryptocurrencies representing 18,016 cryptocurrency-year-months between 2014 and 2018. The monthly percentage of successful terror attacks Granger causes the monthly cryptocurrency returns and lowers the monthly cryptocurrency returns. Increasing success in terror attacks is negatively associated with cryptocurrency returns, the count of wounded is negatively associated with cryptocurrency returns, however, the count of dead is positively associated with cryptocurrency returns. The success in terror attacks has the largest effect on returns, relative to the count of wounded and dead. The estimates are consistent when controlling for cross-sectional correlation among major cryptocurrencies, and cryptocurrencies could be a weak hedge against successful terrorist attacks. The findings are robust to cryptocurrencies in the top three quartiles of the market capitalization and the mediation analysis shows that terror attacks lower returns through the decline in the short-term macroeconomic cycle.