  Cryptocurrency exchanges are frequently targeted and compromised by
cyber-attacks, which may lead to significant losses for the depositors and
closure of the affected exchanges. These risks threaten the viability of the
entire public blockchain ecosystem since exchanges serve as major gateways for
participation in public blockchain technologies. In this paper, we develop an
economic model to capture the short-term incentives of cryptocurrency exchanges
with respect to making security investments and establishing transaction fees.
Using the model, we derive conclusions regarding an exchange's optimal economic
decisions, and illustrate key features of these conclusions using graphs based
on real-world data. Our security investment model exhibits horizontal scaling
properties with respect to reducing exposure to losses, and may be of special
interest to exchanges operating in markets with high price volatility.
