Cryptocurrency bubble

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In the 2010s, various scholars and journalists have claimed that some cryptocurrencies have been involved in, or are displaying the signs of, an economic bubble phenomenon.[1] This has led to extreme volatility in cryptocurrency researchers say could create a bubble because whoever owns the majority of these essentially control the whole market [2].    

General[edit | edit source]

While some have cautioned that the cryptocurrencies may reflect the characteristics of historical bubbles, others argue that cryptocurrency bubbles are indicative of unforeseen technological problems in new economic markets.[3][better source needed] Although there are usually strict limits on the units to be produced of each cryptocurrency, the value can still legally go to zero in the areas it is banned if it is made illegal to use. There are numerous cryptocurrencies in circulation currently the most important are for Litecoin at 5.5 billion dollars, Ripple at 9.7 billion dollars, Ethereum at 44.3 billion dollars, and the most significant Bitcoins at 185.5 billion[4]. Overall these represent the majority of cryptocurrency market which signify 73% of the total cryptocurrency market value [5].The intrinsic volatility of cryptocurrency has have tremendous swings in value which change yearly, monthly, and even daily.  The main drivers of volatility specifically include a sudden increase in the “buzz” surrounding a cryptocurrency could be understood as a signal of increasing volatility [6]. The high volatility most frequently coincides with high volume and price drops. If market participants are risk-averse, given the same expected mean returns, they would be less willing to hold the cryptocurrency if future volatility increases, which would drive prices down and affect returns negatively [7]. This effect would become evident shortly after the surge in "buzz" or popularity.

Bitcoin[edit | edit source]

Bitcoin has been labelled a speculative bubble by many including former Fed Chairman Alan Greenspan[8] and economist John Quiggin.[9] Nobel Memorial Prize laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble"[1]. Journalist Matthew Boesler in 2013 rejected the speculative bubble label and saw bitcoin's quick rise in price as nothing more than normal economic forces at work.[10] Timothy B. Lee, in a 2013 piece for The Washington Post pointed out that the observed cycles of appreciation and depreciation do not correspond to the definition of speculative bubble.[11] On 14 March 2014, the American business magnate Warren Buffett said, "Stay away from it. It's a mirage, basically."[12]

Two lead software developers of bitcoin, Gavin Andresen[13] and Mike Hearn,[14] have warned that bubbles may occur. David Andolfatto, a vice president at the Federal Reserve Bank of St. Louis, stated, "Is bitcoin a bubble? Yes, if bubble is defined as a liquidity premium." According to Andolfatto, the price of bitcoin "consists purely of a bubble," but he concedes that many assets "have bubble component to their price".[15]

Researchers Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman claimed that in late 2013, price manipulation by one person likely caused a price spike from USD$150 to more than USD$1000.[16]

Speculation in bitcoin has been compared to the tulip mania of seventeenth-century Holland. Comparisons have been made by the vice-president of the European Central Bank, Vítor Constâncio, by JPMorgan Chase chief Jamie Dimon,[17] by hedge fund manager Ken Griffin of Citadel,[18] and by former president of the Dutch Central Bank, Nout Wellink.[19] In 2013, Wellink remarked, "This is worse than the tulip mania [...] At least then you got a tulip [at the end], now you get nothing."[19] On 13 September 2017, Jamie Dimon compared bitcoin to a bubble, saying it was only useful for drug dealers and countries like North Korea.[20] However, in a January 2018 interview Jamie Dimon voiced regrets about his earlier Bitcoin remarks, and noted "The blockchain is real, You can have cryptodollars in yen and stuff like that. ICOs ... you got to look at everyone individually."[21]

On 22 September 2017, a hedge fund named Blockswater subsequently accused JP Morgan of market manipulation and filed a market abuse complaint with Financial Supervisory Authority (Sweden).[22]

The Guardian, CNBC, Forbes and Evening Standard compared bitcoin to bubbles such as the South Sea Bubble, the Wall Street Crash, the sub-prime mortgage crisis and the Dot-com bubble.[23][24][25][26]

Altcoins[edit | edit source]

A January 2018 article by CBS cautioned in regards to a cryptocurrency bubble and fraud, citing the British company called BitConnect who received a cease-and-desist order by the Texas State Securities Board, since they promise massive monthly returns but haven't even registered with state securities regulators or cited an office address.[27]

Other comparisons[edit | edit source]

Economics writer Jason Murphy dubbed the current rise in house prices, bond market, stock market, and bitcoin, the everything bubble.[28]

ICOs[edit | edit source]

As in 2017 ICO market has surpassed the $1 bln mark, with some of the ICO campaigns including EOS, Bancor and Tezos successfully raising hundreds of millions of dollars.[29] Wired noted in 2017 that the bubble was about to burst.[30] Some investors have flooded into ICOs in hopes of participating in the financial gains similar to those enjoyed by early Bitcoin or Ethereum speculators.[31][32]

See also[edit | edit source]

References[edit | edit source]

  1. 1.0 1.1 Shiller, Robert (1 March 2014). "In Search of a Stable Electronic Currency". New York Times. Archived from the original on 24 October 2014. Retrieved 31 October 2014. 
  2. "Bitcoin biggest bubble in history, says economist who predicted 2008 crash". 
  3. Analysis of Cryptocurrency Bubbles. Bitcoins and Bank Runs: Analysis of Market Imperfections and Investor Hysterics. Social Science Research Network (SSRN). Accessed 24 December 2017.
  4. "Predicting the Volatility of Cryptocurrency Time–Series" (PDF). 
  5. "Predicting the Volatility of Cryptocurrency Time–Series" (PDF). 
  6. "Correction: Buzz Factor or Innovation Potential: What Explains Cryptocurrencies' Returns". 
  7. "Correction: Buzz Factor or Innovation Potential: What Explains Cryptocurrencies' Returns". 
  8. Kearns, Jeff (4 December 2013). "Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value". bloomberg.com. Bloomberg LP. Archived from the original on 29 December 2013. Retrieved 23 December 2013. 
  9. Quiggin, John (16 April 2013). "The Bitcoin Bubble and a Bad Hypothesis". The National Interest. Archived from the original on 22 October 2014. Retrieved 31 October 2014. 
  10. Boesler, Matthew (7 March 2013). "ANALYST: The Rise Of Bitcoin Teaches A Tremendous Lesson About Global Economics". Business Insider. Archived from the original on 14 October 2014. Retrieved 31 October 2014. 
  11. Lee, Timothy (5 November 2013). "When will the people who called Bitcoin a bubble admit they were wrong". The Washington Post. Archived from the original on 11 January 2014. Retrieved 10 January 2014. 
  12. Crippen, Alex (14 March 2014). "Bitcoin? Here's what Warren Buffett is saying". CNBC. Archived from the original on 13 January 2017. Retrieved 11 January 2017. 
  13. Dan Caplinger (4 April 2013). "Bitcoin's History of Crushing Speculators". The Motley Fool. Archived from the original on 7 January 2014. Retrieved 7 January 2014. 
  14. Barford, Vanessa (13 December 2013). "Bitcoin: Price v hype". bbc.com. BBC. Archived from the original on 19 December 2013. Retrieved 23 December 2013. 
  15. Andolfatto, David (31 March 2014). "Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies" (PDF). Dialogue with the Fed. Federal Reserve Bank of St. Louis. Archived (PDF) from the original on 9 April 2014. Retrieved 16 April 2014. 
  16. Biggs, John. "Researchers find that one person likely drove Bitcoin from $150 to $1,000". TechCrunch. Archived from the original on 15 January 2018. Retrieved 15 January 2018. 
  17. "Bitcoin is like Tulipmania, says ECB vice-president". The Financial Times. 22 September 2017. Archived from the original on 30 September 2017. 
  18. "Billionaire hedge fund manager Ken Griffin says bitcoin has 'elements of the tulip bulb mania'". CNBC. 27 November 2017. Archived from the original on 4 December 2017. 
  19. 19.0 19.1 "Bitcoin hype worse than 'tulip mania', says Dutch central banker". The Guardian. 4 December 2013. Archived from the original on 20 March 2017. 
  20. "JPMorgan CEO doubles down on trashing bitcoin". Archived from the original on 24 September 2017. Retrieved 23 September 2017. 
  21. "Jamie Dimon says he regrets calling bitcoin a fraud and believes in the technology behind it". CNBC. 9 January 2018. 
  22. "Jamie Dimon accused of market manipulation over 'false, misleading' bitcoin comments". Archived from the original on 24 September 2017. Retrieved 23 September 2017. 
  23. "Bitcoin bubble? The warnings from history". The Guardian. 2 December 2017. Archived from the original on 4 December 2017. 
  24. "Bitcoin, Litecoin, We're Well Into South Sea Bubble Territory Here". Forbes. 28 November 2013. Archived from the original on 4 December 2017. 
  25. "Bitcoin is in a bubble, and here's how it's going to crash". CNBC. 13 September 2017. Archived from the original on 4 December 2017. 
  26. "Is the bitcoin bubble about to burst?". Evening Standard. 27 September 2017. Archived from the original on 1 October 2017. 
  27. "5 reasons to tread carefully in cryptocurrencies". CBS. January 5, 2018. 
  28. Jason Murphy (January 13, 2018). "The 'everything bubble' could pop in 2018". news.com.au. 
  29. "ICO Market Crosses $1 Billion Mark, Is Bubble Imminent?". Cointelegraph. 9 July 2017. 
  30. "The ICO bubble is about to burst but that's a good thing, Expect a slowdown in ICOs in 2018, as token sales become less of a Wild West". Wired. 12 December 2017. 
  31. "Explaining the new cryptocurrency bubble—and why it might not be all bad Investors are pouring tens of millions of dollars into new cryptocurrencies". Arstechnica. October 5, 2017. 
  32. Initial Coin Offerings (ICOs): Risks, Regulation, and Accountability. Regulation of Financial Institutions Journal: Social Science Research Network (SSRN). Accessed 6 December 2017.

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