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 Regularization Method for detecting the beginning of a new market regime, we identify three major peaks and 10 additional smaller peaks, that have punctuated the dynamics of Bitcoin price during the analysed 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’ times t2 before the crashes, we employ a clustering method to group the predicted critical times tc of the LPPLS fits over different time scales, where tc is the most probable time for the ending of the bubble. Each cluster is proposed as 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.
Highlights
From an investment point of view, during the past decade, Bitcoin has become known for two main reasons: its extraordinary return potential in phases of extreme price growth as well as regular royalsocietypublishing.org/journal/rsos R
Introduced in 2008 [1], Bitcoin started trading on organized markets in 2010 and, from the beginning, has exhibited a turbulent market history such that the bubble culminating in December 2017 does not appear to be that exceptional
After applying these filtering conditions, for the set of 10 short bubble peak times shown in the bottom frame of figure 1, we find that eight of them qualify as end times of real short bubbles
Summary
From an investment point of view, during the past decade, Bitcoin has become known for two main reasons: its extraordinary return potential in phases of extreme price growth as well as regular royalsocietypublishing.org/journal/rsos R. As a consequence of the crash following mid- 2 December 2017, a book-to-market value of more than 200 billion US Dollars of Bitcoin’s total market capitalization evaporated within only six weeks, resulting in a cumulative loss from the peak of 41% (over 42 trading days after the peak that occurred in mid-December 2017). The massive crash was preceded by a no less impressive 43 times price boost (over 730 days before the peak in midDecember 2017). Introduced in 2008 [1], Bitcoin started trading on organized markets in 2010 and, from the beginning, has exhibited a turbulent market history such that the bubble culminating in December 2017 does not appear to be that exceptional. As we will demonstrate in this paper, multiple overlapping short- and long-term Bitcoin price bubbles have appeared between 2012 and 2018. The goal of this study is to document these bubbles and crashes, put them into a historical perspective and analyse their predictability
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