All that glitters: A theory of multiple bubbles with implications for cryptocurrencies

Jungsuk Han and Yenan Wang

Journal of Monetary Economics, 2025, vol. 152, issue C

Abstract: We analyze a model of heterogeneous rational bubbles that compete and complement each other. When some bubbles burst, surviving ones gain value, offsetting losses from collapsed bubbles. This “compensation effect,” combined with diversification, enhances welfare. A portfolio of fragile bubbles may rival a single, stable bubble. The stationary equilibrium imposes a tight upper bound on bubble size, considering covariance structures, price fluctuations, and the emergence of new bubbles. These results have important policy implications, particularly for managing crypto ETFs and issuing CBDCs, highlighting the potential benefits of a diversified approach to fragile financial systems.

Keywords: Rational bubbles; Bubble bursting; Diversification; Crypto ETF; Nonstationary equilibrium (search for similar items in EconPapers)
JEL-codes: D53 E44 E51 E58 G01 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:152:y:2025:i:c:s0304393225000352

DOI: 10.1016/j.jmoneco.2025.103764

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