Financial Bubbles in Bitcoin and Altcoin Cryptocurrency

Markets

Mehmet Fatih BUĞAN1

Akademik Araştırmalar ve Çalışmalar Dergisi 2021, 13(24), 165-180 Journal

of Academic Researches and Studies 2021, 13(24), 165-180
https://doi.org/10.20990/kilisiibfakademik.880126 Makale Türü: Araştırma
Makalesi Paper Type: Research Paper Geliş tarihi/Recceived: 14.02.2021
Kabul tarihi/Accepted: 13.03.2021
 I. Aim of the Study:
 This research aims to examine the existence of the bubbles in cryptocurrencies with
the boundaries that uses top 5 currencies Bitcoin, Ethereum, Litecoin, Chainlink,
Ripple and Cardano among over the 4000 currencies in the market listed by their
market capitalization through the best convenient test GSADF.
A short information related with the theory of the article:
To begin with, it could be better to understand the definition and structure of some related
terms in the article. It is clear from the passage that cryptocurrencies are the best well known
innovation last 10 years starting with Bitcoin and spreading with other altcoins in the market.
Bitcoin is revealed through an article named “A peer-to peer Electronic Cash System’’ written
by Satoshi Nakamoto in 2008. Although Bitcoin was created as a digital money because of its
volatility treated it like an investment instrument. On the other hand, it would be beneficial to
understand the financial bubbles in the different assets. Basically, a speculative bubble is a
spike in asset values within a particular industry, commodity, or asset class to unsubstantiated
levels, fueled by irrational speculative activity that is not supported by the fundamentals.
Charles Kindleberger categorized the constitution of the bubbles in 5 steps: displacement,
boom, euphoria, crisis and revulsion. All the bubbles begin with based on the real
improvement and they get value they do not deserve over the time with effect of fear of
missing out. In the displacement part, specific improvement in the economy occurred which
attract attention of the people to invest, and it is related to the technology most of the time.
Furthermore, story of the improvement is getting stronger, and it spreads not only among the
related people but also in various areas are in the public. When it comes to the boom part,
investors who invest in the first steps of this process get profit from it, so this advantageous
asset become famous. Therefore, the price of this asset reaches the exorbitant price by
exceeding the base price that founded from fundamental analysis. Burster of bubbles occur in
the next step which causes the collapse in the prices. So, investors try to sell their asset, but
they cannot find the customers because customers would foresee the reduction of the price
anymore. The last part concludes with revulsion that media and investors try to blame other
effects by meeting with irrational prices in the assets.
II. Hypotheses:
The hypothesis of this article is deciding the existence of bubbles in the top 5 cryptocurrencies
which are chosen in terms their market capitalization. Financial bubbles were detected in
Bitcoin and altcoins according to the findings of the study. While the bubbles detected for
Bitcoin, Ethereum, Ripple, and Chainlink are statistically significant, the financial bubbles
detected for Litecoin and Cardano are not statistically significant.
III. Data:
Bitcoin: During the analysis period, 18 financial bubbles were detected and 6 of them were
longer than 10 days. Bitcoin experienced ATH (All Time High) and cost $20,000. It is
observed that a 19-day bubble is formed in this period in December 2017. Another long-term
bubble period is between the end of 2020 and the beginning of 2021, when Bitcoin renews the
ATH and Bitcoin's market value exceeded $ 40,000 in this time.
Ethereum: During the sampling period, 13 balloons were detected, 4 of which were 10 days
or more. It renewed the ATH which is last 40 days, started at the end of 2020 and continue
until beginning of 2021.
Chainlink: 14 balloons were detected in Chainlink as well that only 3 of them are 10 days and
it took longer. Half of the detected balloons last for 1 day. Unlike the Bitcoin and Chainlink,
no bubble was detected in the Ethereum at the end of 2017. The bubbles which is occurred at
the end of the year 2020 in the market were occurred for Ethereum at the beginning of 2021.
Ripple: The number of bubbles detected for cryptocurrencies is lower than the number of
bubbles detected in other cryptocurrencies. All the 5 balloons detected lasted less than 10
days.
Litecoin: 14 bubbles were also detected in the Litecoin price series, but balloons were not
found to be statistically significant according to the GSADF test.
IV. Sample:
Cryptocurrencies data set used in the research is obtained from binance.com and observation
time is different for each currency type: For Ethereum between 17/08/2017- 02/02/2021
(1267 days observation), for Litecoin between 14/12/2017- 02/02/2021 (1148 days
observation), for Chainlink between 16/01/2019- 02/02/2021 (749 days observation), for
Ripple between 04/05/2018-02/02/2021 (1006 days observation) and for Cardano between
17/04/2018-02/02/2021 (1023 days observation).
 Bitcoin has the largest market dividends, and it leads the market significantly by using
its dominance in the market for altcoins. After that Ethereum share the second largest
dividend according to its capitalization and it is also correlated with Bitcoin highly
that specification help it to lead other altcoins in the market. Bitcoin has the highest
standard deviation among the other currencies following to it Ethereum and Litecoin
are comes and the lowest are Ripple and Cardano. According to skewness, kurtosis
 values and Jarque-Bera normality test cryptocurrencies does not appear to show
normal distribution.

V. Analysis method-Graphics/Charts/Calculations:
 According to Coinmarketcap data, the top ten cryptocurrencies with the highest value
in terms of market capitalization are presented in Table 1.

“The total market value of cryptocurrencies is around $1 Trillion as of February 2021.

About 90% of this value is comprised of the top ten cryptocurrencies in Table 1. The price,
value and transaction volumes of cryptocurrencies have a highly volatile structure. For this
reason, the figures and rankings in Table 1 may change constantly.”
 In order to examine the volatility in the price of cryptocurrencies, the price movements of
Bitcoin, especially since 2013, when the price increases started, are presented in Figure 1.
The increase in Bitcoin price, which started in 2013, accelerated towards the end of 2017 and
reached $20,000. Later, the downward trend in Bitcoin price started and at the end of 2018,
the price was withdrawn to $ 4,000. With the rapid rise that started at the end of 2020, the
price of one Bitcoin reached $ 40,000 as of February 2021. As can be seen in Figure 1, it is
possible to observe severe decreases and increases in the price of the asset during the
specified dates.
Time value of money and dividend discount model, which are important subjects of finance
theory, form the theoretical infrastructure of the first period tests developed for the detection
of financial bubbles (Basse et al., 2021 (2011) and Phillips et al. (2015) developed the method
of Diba and Grossman (1988) in a recursive and time-varying way to detect financial bubbles
in the ADF test. In this study, GSADF and retrospective augmented DF (Backward supremum
ADF-BSADF) tests were used to detect financial bubbles in crypto money markets. Iterative
ADF regression is given in equation 1;
 “k represents the transient value of the lag, and 𝑟1 and 𝑟2 represent the start and end
points of the entire analysis period included in the regression. Phillips et al. (2015) defined
the generalized sup ADF (GSADF) as the largest ADF statistic obtained as a result of
double iteration between 𝑟1 and 𝑟2. In other words, this test is based on the idea of
repeating the ADF regression in equation (1) generated for the subsamples.”

 𝑟0 is the smallest sampling window,

 𝑟1 is the starting point of the sample,
 𝑟2 represents the endpoint of each sample.
Phillips et al. (2015) used the BSADF test to determine the start and end dates of financial
bubbles that occurred during the analysis period.

The start and end dates of financial baons are calculated as follows;
  𝑐𝑣𝑟2 𝛽𝑇 represents the 100% (1-𝛽𝑇) critical value of the BSADF test statistic of the
number of observations at point 𝑟2 in the whole sample.
VI. Conclude from the Findings:
With the increasing interest of Bitcoin, the first crypto currency, and the increase in
exchanges that allow trading, many cryptocurrencies have been introduced to the market.
According to Coinmarketcap data, there are more than 4,000 altcoins traded on the stock
market in early 2021. However, the dominance of Bitcoin in total market capitalization is still
quite high. In this study, multiple financial bubbles that occurred in the top 5 cryptocurrencies
(Ethereum, Litecoin, Chainlink, Ripple and Cardano) after Bitcoin in terms of Bitcoin and
market cap were examined. As a result of the study, multiple financial bubbles were detected
in Bitcoin and altcoins.
While the bubbles detected for Bitcoin, Ethereum, Ripple and Chainlink are statistically
significant, the financial bubbles detected for Litecoin and Cardano are not statistically
significant. In the Bitcoin and altcoin markets, especially at the end of 2017, financial bubbles
are observed. In December 2017, Bitcoin reached the level of approximately $ 20,000 by
performing ATH.
At that time, Bitcoin futures contracts started to be traded on leading US stock exchanges
such as Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).
In 2019, the CBOE stopped listing Bitcoin futures contracts.
At the beginning of 2018, there were serious decreases in the price of Bitcoin and the ATH
value at the end of 2017 only reached the end of 2020. The negative atmosphere created by
the COVID-19 epidemic in the financial markets at the beginning of 2020 also affected
Bitcoin prices. However, at the end of 2020, Bitcoin exceeded the value of $ 40,000 by
replacing the ATH. The financial bubble periods obtained from the study draw attention
especially to the end of 2017 and 2020. According to the finance literature, speculation in the
prices of financial instruments with forward contracts in organized markets will decrease and
financial bubbles will not occur. However, as a result of the study, it has been observed that
financial bubbles have also occurred in Bitcoin and Ethereum prices, whose futures contracts
are traded in organized markets.
VII. Conclusion and Implications:
 The findings obtained from the study are important for researchers, policy makers,
professionals and investors. First of all, the fact that the data set used in the study is
up-to-date made it possible to detect financial bubbles that took place at the end of
2020.
  In addition, investors with a high risk appetite can consider cryptocurrencies as an
alternative investment tool, as they think that the increase will continue during bubble
periods. However, since bubbles result in major collapses, this study can guide
investors in terms of the need to stay away from financial assets during bubble
periods. In future studies, it will be useful to determine the price bubbles in the Bitcoin
futures market and to examine the relationship between the spot market and the futures
market in price formations. The findings obtained from the study are important for
researchers, policy makers, professionals and investors.
References:
 Adämmer, P., & Bohl, M. T. (2015). Speculative bubbles in agricultural prices. The
Quarterly Review of Economics and Finance, 55, 67-76.
https://doi.org/10.1016/j.qref.2014.06.003
 Agosto, A., & Cafferata, A. (2020). Financial bubbles: A study of co-explosivity in the
cryptocurrency market. Risks, 8(2), 34. https://doi.org/10.3390/risks8020034
 Baek, C., & Elbeck, M. (2015). Bitcoins as an investment or speculative vehicle? A
first look. Applied Economics Letters, 22(1), 30-34.
https://doi.org/10.1080/13504851.2014.916379
 Baur, D. G., Hong, K., & Lee, A. D. (2018) Bitcoin: Medium of exchange or
speculative assets? Journal of International Financial Markets, Institutions and Money,
54, 177-189. https://doi.org/10.1016/j.intfin.2017.12.004
 Bertus, M., & Stanhouse, B. (2001). Rational speculative bubbles in the gold futures
market: An application of dynamic factor analysis. Journal of Futures Market, 21(1),
79-108. 21 https://doi.org/10.1002/1096-9934(200101)21:13.0.CO;2-D
 Bianchetti, M., Ricci, C., & Scaringi, M. (2018). Are cryptocurrencies real financial
bubbles? Evidence from quantitative analyses. A version of this paper was published
in Risk, 26 January 2018, http://dx.doi.org/10.2139/ssrn.3092427
 Bouri, E., Shahzad, S. J. H., & Roubaud, D. (2019). Co-explosivity in the
cryptocurrency market. Finance Research Letters, 29, 178-183.
https://doi.org/10.1016/j.frl.2018.07.005
 Cagli, E. C. (2019). Explosive behavior in the prices of Bitcoin and altcoins. Finance
Research Letters, 29, 398-403. https://doi.org/10.1016/j.frl.2018.09.007
 Chan, K., McQueen, G., & Thorley, S. (1998) Are there rational speculative bubbles
in Asian stock markets? Pacific-Basin Finance Journal, 6(1-2), 125-151.
https://doi.org/10.1016/S0927- 538X(97)00027-9
 Cheah, E-T., & Fry, J. (2015) Speculative bubbles in Bitcoin markets? An empirical
investigation into the fundamental value of Bitcoin. Economics Letters, 130, 32-36.
https://doi.org/10.1016/j.econlet.2015.02.029
 Choi, S. H., & Jarrow, R. (2020). Testing the local martingale theory of bubbles using
cryptocurrencies. http://dx.doi.org/10.2139/ssrn.3701960
 Ciaian, P., Rajcaniova, M., & Kancs, D. A. (2016), The economics of Bitcoin price
formation. Applied Economics, 48(19), 1799-1815.
https://doi.org/10.1080/00036846.2015.1109038
 Corbet, S., Lucey, B., & Yarovaya, L. (2018). Datestamping the Bitcoin and Ethereum
bubbles. Finance Research Letters, 26, 81-88. https://doi.org/10.1016/j.frl.2017.12.006
 Çelikhan, F. F., & Kılıç, Y. (2019). Bitcoin kullanım davranışlarına yönelik bir
araştırma. İçinde E. Gemici (Ed.), Teorik ve ampirik perspektifte seçilmiş finans
konuları (ss. 115-146). Nobel Bilimsel Eserler.
 Çütcü, İ., & Kılıç, Y. (2018). Bitcoin fiyatları ile dolar kuru arasındaki ilişki: Yapısal
kırılmalı zaman serisi analizi. Yönetim ve Ekonomi Araştırmaları Dergisi, 16(4), 349-
366. https://doi.org/10.11611/yead.474993
 Diba, B. T., & Grossman, H. I. (1988). Explosive rational bubbles in stock prices?.
American Economic Review, 78(3), 520-530. https://www.jstor.org/stable/1809149
 Evans, G. (1986). A test for speculative bubbles in the Sterling-Dollar exchange rate:
1981-84. The American Economic Review, 76(4), 621-636. February 9, 2021,
http://www.jstor.org/stable/1806063
 Fry, J., & Cheah, E-T. (2016). Negative bubbles and shocks in cryptocurrency
markets. International Review of Financial Analysis, 47, 343-352.
https://doi.org/10.1016/j.irfa.2016.02.008
 Gemı̇ cı̇ , E., & Polat, M. (2019a). Bitcoin fiyatlarında eşik değer etkisi. Mehmet Akif
Ersoy Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 6(3), 669-681.
https://doi.org/10.30798/makuiibf.593500
 Gemici, E., & Polat, M. (2019b). Relationship between price and volume in the
Bitcoin market. The Journal of Risk Finance, 20(5), 435-444.
https://doi.org/10.1108/JRF-07-2018-0111
 Geuder, J., Kinateder, H., & Wagner, N. F. (2019). Cryptocurrencies as financial
bubbles: The case of Bitcoin. Finance Research Letters, 31, 179-184.
https://doi.org/10.1016/j.frl.2018.11.011
 Goodman, A., & Thibodeau, T. (2008). Where are the speculative bubbles in the US
housing markets? Journal of Housing Economics, 17, 117-137.
https://doi.org/10.1016/j.jhe.2007.12.001