It's official - research proves Bitcoin's bubble

Published: 15 December 2017 at 10:32

Close up of a bitcoin on top of a computer chip

Academics warn that the cryptocurrency has become overvalued in recent weeks

New research shows that the cryptocurrency Bitcoin is in a bubble, and could pose a threat to the financial stability of traditional currencies and markets.

The study by Anglia Ruskin University, Trinity College Dublin and Dublin City University has examined the existence and dates of pricing bubbles in cryptocurrencies Bitcoin and Ethereum, and the drivers of their price.

The research tested how easy it is to “mine” a new Bitcoin, the length of a Blockchain “block” (an online register which records all Bitcoin transactions), the speed of computers attempting to mine for Bitcoin, and the number of transactions. These tests on the fundamentals of the cryptocurrency were carried out for a number of different time periods and examined the price of Bitcoin during those times, to see if the price was artificially inflated.

Bitcoin in particular has shown a surge in price in recent months and one Bitcoin is currently valued at around £12,500. However, the study shows that it has technically been in a bubble since the price rose above £1,000, based on its efficiency to perform as a currency (its ability to serve as a medium of exchange or to store value) and volatility of its returns, which were found to be 26 times higher than the those of the Standard and Poor 500 index.

Co-author Dr Larisa Yarovaya, Lecturer in Accounting and Finance at Anglia Ruskin University, said: 


“Our evidence finds that the price of Bitcoin has been artificially inflated by speculative investment, putting it in a bubble.

“This classification may change as usage grows, volatility decreases and Bitcoin attracts market and economic influence. In doing so, Bitcoin may become a more balanced investment vehicle, driven both internally and externally.

“As the price of Bitcoin explodes, it runs the risk of flying apart. Although Bitcoin is not regulated by governments, it could still have a knock-on effect on traditional markets due to the interconnectedness of cryptocurrency markets with other financial assets.”

The full, open access paper can be read online here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3079712