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Economics > Econometrics

Title: Are Bitcoin Bubbles Predictable? Combining a Generalized Metcalfe's Law and the LPPLS Model

Abstract: We develop a strong diagnostic for bubbles and crashes in bitcoin, by analyzing the coincidence (and its absence) of fundamental and technical indicators. Using a generalized Metcalfe's law based on network properties, a fundamental value is quantified and shown to be heavily exceeded, on at least four occasions, by bubbles that grow and burst. In these bubbles, we detect a universal super-exponential unsustainable growth. We model this universal pattern with the Log-Periodic Power Law Singularity (LPPLS) model, which parsimoniously captures diverse positive feedback phenomena, such as herding and imitation. The LPPLS model is shown to provide an ex-ante warning of market instabilities, quantifying a high crash hazard and probabilistic bracket of the crash time consistent with the actual corrections; although, as always, the precise time and trigger (which straw breaks the camel's back) being exogenous and unpredictable. Looking forward, our analysis identifies a substantial but not unprecedented overvaluation in the price of bitcoin, suggesting many months of volatile sideways bitcoin prices ahead (from the time of writing, March 2018).
Subjects: Econometrics (econ.EM); General Finance (q-fin.GN)
Cite as: arXiv:1803.05663 [econ.EM]
  (or arXiv:1803.05663v1 [econ.EM] for this version)

Submission history

From: Spencer Wheatley Dr. [view email]
[v1] Thu, 15 Mar 2018 09:47:25 GMT (1538kb)