51% attacks' impact on prices

This post was originally published on September 05, 2019, and sent to Messari Pro subscribers.

The value of decentralized networks comes from the ability for multiple parties to agree on a common “truth.” In a blockchain, this truth comes from an immutable history of transactions recorded to the ledger. If an attacker is able to alter this truth the value of the network, and any associated cryptoasset, would be damaged.

The most well-known attack on a blockchain is a majority, or 51%, attack. In this scenario, an individual or group is able to gain a majority of hashrate and create double-spend transactions. As Bitcoin Wiki explains it the attacker “submits to the merchant/network a transaction which pays the merchant, while privately mining a blockchain fork in which a double-spending transaction is included.” Breaker magazine provides a more detailed breakdown and an example of what a double-spend looks like.

While a 51% attack is possible on any network the costs to gain a majority of hashrate makes it prohibitively expensive. Attacking Bitcoin, for example, would cost ~$1 million per hour according to Crypto51.app. Smaller networks, on the other hand, are easier to gain control of. According to Messari Pro data, at least 13 networks have suffered a majority attack in the past.

So with this data its time to ask the question: Do 51% attacks impact the value of cryptoassets? Looking at the seven-day performance following an attack the majority of assets showed negative returns with Horizen dropping the most at -30.1%. Interestingly, six of the 13 assets actually gained in value in the week after an attack, with Electroneum, Verge, and Waltoncoin all showing double-digit returns.

Expanding our scope to the seven days before and after attack, it becomes clear that these events have little impact on price. Assets that had been trending up tended to continue rising while those that were falling tended to end with a negative return.

Admittedly, a seven-day period could be too small to truly measure the impact of an attack and dissemination of this news could take longer to reach investors. Its more likely though that speculation continues to be the primary use case for most cryptoassets outside of a few, and fundamental events have little impact on price - especially for smaller networks.