Testing for Bubbles in the Bitcoin Market

Abstract

Intrigued by Bitcoin’s exceptional value development and media attention the last years, we assess if there have been any speculative bubbles in the Bitcoin market and if it exists any bubble today. Our empirical analysis can be divided into three steps. First, it is conducted an econometric test on the existence and date stamping of bubbles in Bitcoin prices based on a new recursive test proposed by Phillips et al (2015) – the SADF and GSADF test. However, this statistical test derives a bubble conclusion from an explosive price behavior. This deviates from common definitions of bubbles within financial theories that a bubble exists if the value of an asset exceeds its fundamental value. Over the period 2010 – April 2018, we detected several of short-lived bubbles and a number of huge bubbles. Our empirical results indicate that there are found six huge bubbles during 2011-2018 lasting from 24 days – 123 days. Our statistical evidence suggests that there does not exist any bubbles in the Bitcoin market today. Second, we find that these bubbles may not incorporate information about rational expectation but rather of irrational exuberances, a finding consistent with the theory presented in the Google Trends, The RSI and the bubble model of “The Stages in a Bubble”. Third, we find that there are some reoccurring trends that are affecting the Bitcoin market investigating the date-stamping results. These are the incidents of the Mt. Gox and China’s relation to Bitcoin as a legal currency.