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

Spencer Wheatley, Didier Sornette, Tobias Huber, Max Reppen and Robert N. Gantner
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Spencer Wheatley: ETH Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute
Tobias Huber: ETH Zurich
Max Reppen: ETH Zurich
Robert N. Gantner: D ONE Solutions AG

No 18-22, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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).

Keywords: Bitcoin; crypto-currencies; bubble; prediction; Metcalfe law; log-periodic power law singularity; LPPLS; Johansen-Ledoit-Sornette (search for similar items in EconPapers)
JEL-codes: C53 E47 G01 G17 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2018-03, Revised 2018-03
New Economics Papers: this item is included in nep-pay
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1822

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