Crypto-currency bubbles: an application of the Phillips–Shi–Yu (2013) methodology on Mt. Gox bitcoin prices

Abstract

The creation of Bitcoin heralded the arrival of digital or crypto-currency and has been regarded as a phenomenon. Since its introduction, it has experienced a meteoric rise in price and rapid growth accompanied by huge volatility swings, and also attracted plenty of controversies which even involved law enforcement agencies. Hence, claims abound that bitcoin has been characterised by bubbles ready to burst any time (e.g. the recent collapse of Bitcoin's biggest exchange, Mt Gox). This has earned plenty of coverage in the media but surprisingly not in the academic literature. We therefore fill this knowledge gap. We conduct an econometric investigation of the existence of bubbles in the bitcoin market based on a recently developed technique that is robust in detecting bubbles -that of Phillips, Shi and Yu (2013a). Over the period 2010-2014, we detected a number of short-lived bubbles; most importantly, we found three huge bubbles in the latter part of the period 2011-2013 lasting from 66 days to 106 days, with the last and biggest one being the one that 'broke the camel's back" -the demise of the Mt Gox exchange.

Persistence in the Cryptocurrency Market

“…ElBahrawy et al (2017) provide a comprehensive analysis of 1469 cryptocurrencies considering various issues such as market shares and turnover. Cheung et al (2015), Dwyer (2014), Bouoiyour and Selmi (2015) and Carrick (2016) show that this market is much more volatile than others. Halaburda and Gandal (2014) analyse its degree of competitiveness Urquhart (2016) and Bartos (2015) focus on efficiency finding evidence for and against respectively.…”

Where is the information on USD/Bitcoin hourly prices?

“…Some of these studies focus their attention on the existence of speculative bubbles (Cheung et al, 2015;Cheah and Fry, 2015) and Glaser et al (2014) have even questioned the motivations behind the implementation of Bitcoin and the resemblance of its exchange activities to pure speculative trading.…”

On the Value of Virtual Currencies

“…In another study, Böhme et al (2015) Cheung et al (2015) and Cheah and Fry (2015) express their concern regarding its "bubble-like" behaviour; see also Weber (2016 In an excellent primer on the mechanics of Bitcoin, Velde (2013) regards Bitcoin as an elegant implementation of virtual currency -controlling its creation and avoiding its duplication simultaneously -but questions whether it can truly rival or replace existing currencies. The paper argues that, should Bitcoin become widely accepted, it is unlikely that it will remain free of intervention by public authorities, if only because the governance of the Bitcoin computational code and "mining" protocol is opaque and vulnerable.…”