Skip to main content
SpringerLink
Log in

Does Bitcoin bubble burst?

  • Published:
Quality & Quantity Aims and scope Submit manuscript

Abstract

This paper explores when will occur and collapse in Bitcoin bubbles by applying generalized sup augmented Dickey–Fuller test method proposed by Phillips et al. (Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500. Singapore Management University, Working Paper, No. 04-2013, 2013). The results show that there are six explosive bubbles in China and five bubbles in U.S. market, mostly occur in the period of huge surges in Bitcoin price. This is consistent with the bubble model originated by Blanchard and Watson (Bubbles, rational expectations and financial markets. NBER Working Paper, No. 945 1982) that certain asset price is decomposed into fundamental and the bubble components. In particular, exogenous shocks, including foreign or domestic economic events lead to the origination of bubbles. Serious financial crisis may trigger long-term and large- scale bubbles, while relative not persistence (short-term) bubbles are caused by domestic particular components. It can be inferred that Bitcoin can be used as a hedge against market specific risk. Finally, Bitcoin bubbles would collapse due to the administrative intervention by economic authorities. Thereby, government should lead public expectation to keep the confidence to authority and reduce the speculation behavior to stabilize the asset price and financial market.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. The reason for the existence of price difference are recognized there is no central authority regulating the price. The arbitrary potentially exists, but it requires additional fees in setting up and verifying accounts at multiple exchanges and there is still the risk that the price differences will have normalized or even reversed by the time your transfer goes through.

  2. Given the assumption of rational behavior and expectations, the price of an asset must simply reflect market fundamentals. Also, the price depends on information about current and future returns from this asset. Blanchard and Watson (1982) propose that a stochastic asset bubble occurs when speculators purchase a financial asset at a price above its fundamental value in the expectation of a subsequent capital gain. If such bubbles persist, investors are irrational in their failure to profit from the “overpriced” asset, which is referred as “irrational bubbles”. Deviations from this market fundamental value are taken as preliminary evidence of irrationality (Flood and Garber 1980).

  3. Silk Road is a black-market shopping site using covert services. This website trades in Bitcoin, and the exchange rate is pegged to the dollar.

  4. The block chain is a growing historical “book of records” containing full information about all transactions that take place in the network. Every BTC client keeps a complete copy of the block chain, stored locally in the form of raw binary data (Garcia et al. 2014).

References

  • Ahamed, L.: Lords of Finance: The bankers Who Broke the World. Penguin Press, New York (2009)

    Google Scholar 

  • Blanchard, O.J., Watson, M.W.: Bubbles, rational expectations and financial markets. NBER Working Paper, No. 945 (1982)

  • Brandvold, M., Molnár, P., Vagstad, K., Valstad, O.C.A.: Price discovery on Bitcoin exchanges. J. Int. Financ. Mark. Inst. Money 36, 18–35 (2015)

    Article  Google Scholar 

  • Bouoiyour, J., Selmi, R.: What does Bitcoin look like? Ann. Econ. Finance 16(2), 449–492 (2015)

    Google Scholar 

  • Bouoiyour, J., Selmi, R., Tiwari, A.K.: Is Bitcoin business income or speculative bubble? Unconditional vs. conditional frequency domain analysis. Ann. Financ. Econ. 10(2), 1–23 (2015)

    Google Scholar 

  • Bouoiyour, J., Selmi, R., Tiwari, A.K., Olayeni, O.R.: What drives Bitcoin price? Econ. Bull. 36(2), 843–850 (2016)

    Google Scholar 

  • Buchholz, M., Delaney, J., Warren, J., Parker, J.: Bits and bets, information, price volatility, and demand for Bitcoin. Economics Working Paper, No. 312. Available at: http://www.bitcointrading.com/pdf/bitsandbets.pdf (2012)

  • Cheah, E.T., Fry, J.: Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Econ. Lett. 130, 32–36 (2015)

    Article  Google Scholar 

  • Cheung, A., Roca, E., Su, J.J.: Crypto-currency bubbles: an application of the Phillips–Shi–Yu (2013) methodology on Mt. Gox bitcoin prices. Appl. Econ. 47(23), 2348–2358 (2015)

    Article  Google Scholar 

  • Ciaian, P., Rajcaniova, M., Kancs, D.: The economics of Bitcoin price formation. Appl. Econ. 48(19), 1799–1815 (2015)

    Article  Google Scholar 

  • Cohan, P.: Are Bitcoins safer than Cyprus? Forbes. Forbes Magazine, 02 April. https://www.forbes.com/sites/petercohan/2013/04/02/are-bitcoins-safer-than-cyprus/#55ebb0d152f2 (2013)

  • Dale, R.S., Johnson, J.E., Tang, L.: Financial markets can go mad: evidence of irrational behaviour during the South Sea Bubble. Econ. Hist. Rev. 58(2), 233–271 (2005)

    Article  Google Scholar 

  • Diba, B.T., Grossman, H.I.: Explosive rational bubbles in stock prices? Am. Econ. Rev. 78(3), 520–530 (1988)

    Google Scholar 

  • Dowd, K.: New Private Monies: A Bit-Part Player?. Institute of Economic Affairs, London (2014). ISBN 978-0-255-36694-6

    Google Scholar 

  • Dyhrberg, A.H.: Hedging capabilities of bitcoin. Is it the virtual gold? Finance Res. Lett. 16, 139–144 (2016)

    Article  Google Scholar 

  • Evans, G.W.: The fragility of sunspots and bubbles. J. Monet. Econ. 23(2), 297–317 (1989)

    Article  Google Scholar 

  • Evans, G.W.: Pitfalls in testing for explosive bubbles in asset prices. Am. Econ. Rev. 81, 922–930 (1991)

    Google Scholar 

  • Evans-Pughe, C.: From megabytes to megabucks [e-currency]. Eng. Technol. 7(4), 59–61 (2012)

    Article  Google Scholar 

  • Flood, R.P., Garber, P.M.: Market fundamentals versus price-level bubbles: the first tests. Polit. Econ. 88, 745–770 (1980)

    Article  Google Scholar 

  • Froot, K.A., Obstfeld, M.: Intrinsic bubbles: the case of stock prices. Am. Econ. Rev. 81, 1189–1214 (1989)

    Google Scholar 

  • Fry, J., Cheah, E.T.: Negative bubbles and shocks in cryptocurrency markets. Int. Rev. Financ. Anal. 47, 343–352 (2016)

    Article  Google Scholar 

  • Garcia, D., Tessone, C.J., Mavrodiev, P., Perony, N.: The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy. J. R. Soc. Interface 11(99), 20140623 (2014)

    Article  Google Scholar 

  • Grinberg, R.: Bitcoin: an innovative alternative digital currency. Hastings Sci. Technol. Law J. 4(1), 160–206 (2011)

    Google Scholar 

  • Grinberg, R.: Bitcoin: an alternative digital currency. Hastings Sci. Technol. Law J. 4, 159–208 (2012)

    Google Scholar 

  • Gürkaynak, R.S.: Econometric tests of asset price bubbles: taking stock. J. Econ. Surv. 22(1), 166–186 (2008)

    Article  Google Scholar 

  • Homm, U., Breitung, J.: Testing for speculative bubbles in stock markets: a comparison of alternative methods. J. Financ. Econom. 10(1), 198–231 (2012)

    Article  Google Scholar 

  • Kerner, S.: Why Marc Andreessen Is Bullish on Bitcoin. EWeek. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=94363513&site=ehost-live (2014)

  • Kindleberger, C.P.: Manias, panics, and crashes: a history of financial crises. Scriblerian Kit-Cats 32(2), 379 (2000)

    Google Scholar 

  • Kristoufek, L.: BitCoin meets Google Trends and Wikipedia: quantifying the relationship between phenomena of the Internet era. Sci. Rep. 3(3415), 1–7 (2013)

    Google Scholar 

  • Kristoufek, L.: What are the main drivers of the Bitcoin price? Evidence from wavelet coherence analysis. PLoS ONE 10(4), e0123923 (2014)

    Article  Google Scholar 

  • Kurihara, Y., Fukushima, A.: The market efficiency of Bitcoin: a weekly anomaly perspective. J. Appl. Finance Bank. 7(3), 57 (2017)

    Google Scholar 

  • Lucas Jr., R.E.: Asset prices in an exchange economy. Econom. J. Econom. Soc. 46, 1429–1445 (1978)

    Google Scholar 

  • MacDonell, A.: Popping the Bitcoin bubble: an application of log-periodic power law modeling to digital currency. University of Notre Dame, Working Paper (2014)

  • Pavlidis, E., Paya, I., Peel, D.: A new test for rational speculative bubbles using forward exchange rates: the case of the interwar German hyperinflation. Working Paper, No. 09-2012 (2012)

  • Phillips, P.C.B., Perron, P.: Testing for a unit root in time series regression. Biometrika 75, 335–346 (1988)

    Article  Google Scholar 

  • Phillips, P., Yu, J.: Dating the timeline of financial bubbles during the subprime crisis. SMU Economics and Statistics Working Paper Series, No. 18-2009 (2009)

  • Phillips, P.C.B., Shi, S., Yu, J.: Testing for multiple bubbles. Singapore Management University, Working Paper, No. 09-2011 (2011a)

  • Phillips, P.C.B., Wu, Y., Yu, J.: Explosive behavior in the 1990s Nasdaq: when did exuberance escalate asset values. Int. Econ. Rev. 52, 201–226 (2011)

    Article  Google Scholar 

  • Phillips, P.C.B., Yu, J.: Dating the timeline of financial bubbles during the subprime crisis. Quant. Econ. 2, 455–491 (2011)

    Article  Google Scholar 

  • Phillips, P.C.B., Shi, S., Yu, J.: Testing for multiple bubbles. Yale University, New Haven, CT, Working Paper, No. 1843 (2012)

  • Phillips, P.C.B., Shi, S., Yu, J.: Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500, Singapore Management University, Working Paper, No. 04-2013 (2013)

  • Plassaras, N.A.: Regulating digital currencies: bringing Bitcoin within the reach of the IMF. Chicago J. Int. Law 14, 377–407 (2013)

    Google Scholar 

  • Ponsford, M.P.: A comparative analysis of Bitcoin and other decentralised virtual currencies: legal regulation in the people’s republic of China, Canada, and the United States. Hong Kong J. Legal Stud. 9, 29–50 (2015)

    Google Scholar 

  • Richardson, V.: Currency kings. Entrepreneur 42, 40 (2014)

    Google Scholar 

  • Reinhart, C.M., Rogoff, K.S.: The aftermath of financial crises. NBER Working Paper No. w14656 (2009)

  • Satter, R.: Cyber currency bursts mainstream. The Sydney Morning Herald. Available at: www.smh.com.au/business/world-business/cyber-currencybursts-mainstream-20130411-2hni3.html (2013)

  • Shiller, R.: Stock prices and social dynamics. Brook. Pap. Econ. Activity 2, 457–498 (1984)

    Article  Google Scholar 

  • Shiller, R.J.: Irrational Exuberance. Princeton University Press, Princeton (2005)

    Google Scholar 

  • Stokes, R.: Virtual money laundering: the case of Bitcoin and the linden dollar. Inf. Commun. Technol. Law 21, 221–236 (2012)

    Article  Google Scholar 

  • Swartz, N.D.: Bursting the Bitcoin bubble: the case to regulate digital currency as a security or commodity. Tulane J. Technol. Intell. Property 17, 319 (2014)

    Google Scholar 

  • Tirole, J.: On the possibility of speculation under rational expectations. Econometrica 50, 1163–1181 (1982)

    Article  Google Scholar 

  • Tirole, J.: Asset bubbles and overlapping generations. Econometrica 53, 1499–1528 (1985)

    Article  Google Scholar 

  • Tsukerman, M.: The block is hot: a survey of the state of Bitcoin regulation and suggestions for the future. Berkeley Technol. Law J. 30, 11–27 (2015)

    Google Scholar 

  • van Wijk, D.: What can be expected from the Bitcoin? Erasmus Rotterdam University. Working Paper, No. 345986 (2013)

  • Vogel, H.L., Werner, R.A.: An analytical review of volatility metrics for bubbles and crashes. Int. Rev. Financ. Anal. 38, 15–28 (2015)

    Article  Google Scholar 

  • Williams, M. T.: Virtual currencies—Bitcoin risk. In: World Bank Conference, Washington, DC. No. 21 (2014)

  • Wu, C.Y., Pandey, V.K.: The value of Bitcoin in enhancing the efficiency of an investor’s portfolio. J. Financ. Plan. 27(9), 44–52 (2014)

    Google Scholar 

  • Yermack, D.: Is Bitcoin a real currency? An economic appraisal. NBER Working Paper, No. 19747 (2014)

Download references

Author information

Authors and Affiliations

  1. Department of Finance, Ocean University of China, 238, Songling Rd., Qingdao, Shandong, China

    Zheng-Zheng Li

  2. Technological Center, Shandong Entry-Exit Inspection and Quarantine Bureau, Qingdao, China

    Ran Tao

  3. Department of Finance, West University of Timisoara, Timisoara, Romania

    Oana-Ramona Lobonţ

  4. School of Economics, Qingdao University, 308, Ningxia Rd., Qingdao, Shandong, China

    Chi-Wei Su

Authors
  1. Zheng-Zheng Li
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ran Tao
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Chi-Wei Su
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Oana-Ramona Lobonţ
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Chi-Wei Su.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Li, ZZ., Tao, R., Su, CW. et al. Does Bitcoin bubble burst?. Qual Quant 53, 91–105 (2019). https://doi.org/10.1007/s11135-018-0728-3

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11135-018-0728-3

Keywords

JEL Classification

Search

Navigation