Dissection of Bitcoin's Multiscale Bubble History

Gerlach J-C, Guilherme Demos and Didier Sornette
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Gerlach J-C: ETH Zurich
Guilherme Demos: ETH Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute

No 18-30, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We present a detailed bubble analysis of the Bitcoin to US Dollar price dynamics from January 2012 to February 2018. We introduce a robust automatic peak detection method that classifies price time series into periods of uninterrupted market growth (drawups) and regimes of uninterrupted market decrease (drawdowns). In combination with the Lagrange Regularisation Method for detecting the beginning of a new market regime, we identify 3 major peaks and 10 additional smaller peaks, that have punctuated the dynamics of Bitcoin price during the analyzed time period. We explain this classification of long and short bubbles by a number of quantitative metrics and graphs to understand the main socio-economic drivers behind the ascent of Bitcoin over this period. Then, a detailed analysis of the growing risks associated with the three long bubbles using the Log-Periodic Power Law Singularity (LPPLS) model is based on the LPPLS Confidence Indicators, defined as the fraction of qualified fits of the LPPLS model over multiple time windows. Furthermore, for various fictitious present analysis times t2, positioned in advance to bubble crashes, we employ a clustering method to group LPPLS fits over different time scales and the predicted critical times tc (the most probable time for the start of the crash ending the bubble). Each cluster is argued to provide a plausible scenario for the subsequent Bitcoin price evolution. We present these predictions for the three long bubbles and the four short bubbles that our time scale of analysis was able to resolve. Overall, our predictive scheme provides useful information to warn of an imminent crash risk.

Keywords: Cryptocurrency; Bitcoin; k-Means Clustering; Multiscale Bubble Indicator; Log-Periodic Power Law Singularity Analysis; Forecasting; Time Series Analysis; Market Crashes (search for similar items in EconPapers)
JEL-codes: C13 C2 C32 C53 C55 C61 G1 G10 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-04
New Economics Papers: this item is included in nep-pay and nep-rmg
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1830

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