Self-sustained price bubbles driven by digital currency innovations and adaptive market behavior

Misha Perepelitsa () and Ilya Timofeyev ()
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Misha Perepelitsa: University of Houston
Ilya Timofeyev: University of Houston

SN Business & Economics, 2022, vol. 2, issue 3, 1-15

Abstract: Abstract In this article we discuss a mechanism of price inflation in a market of digital currencies such as Bitcoin. The phenomenon is attributed to traders who adhere to adaptive approach to investment, rebalancing their investment portfolios and selecting the target portfolios based on the recent changes in the price. The adaptive strategy can be viewed as a psychological response of a trader to the situation when the trader’s estimation of future prices does not match the actual, realized price. We show that the unique property of infinite divisibility of Bitcoin in conjunction with traders adaptive behavior lead to a price bubble that may persist for long time periods. Our approach uses an agent-based model, called the asynchronous stochastic price pump, to quantify main statistical properties of the time series of a bubble, such as the return, the volatility, the systematic risk of a crash, and the distribution of crash times.

Keywords: Adaptive market behavior; Price bubbles; Systematic risk (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s43546-021-00188-w

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