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

22 Pages Posted: 16 Mar 2018 Last revised: 22 Mar 2018

See all articles by Spencer Wheatley

Spencer Wheatley

ETH Zurich

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

Tobias Huber

ETH Zurich

Max Reppen

ETH Zurich

Robert N. Gantner

D ONE Solutions AG

Date Written: March 15, 2018

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

JEL Classification: C53, E47, G01, G17

Suggested Citation

Wheatley, Spencer and Sornette, Didier and Huber, Tobias and Reppen, Max and Gantner, Robert N., Are Bitcoin Bubbles Predictable? Combining a Generalized Metcalfe's Law and the LPPLS Model (March 15, 2018). Swiss Finance Institute Research Paper No. 18-22. Available at SSRN: https://ssrn.com/abstract=3141050 or http://dx.doi.org/10.2139/ssrn.3141050

Spencer Wheatley (Contact Author)

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Tobias Huber

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Max Reppen

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Robert N. Gantner

D ONE Solutions AG

Sihlfeldstrasse 58
Zürich, 8003

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