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Booms, busts and heavy-tails: The story of Bitcoin and cryptocurrency markets?

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  • Fry, John

Abstract

We develop bespoke rational bubble models for Bitcoin and cryptocurrencies that incorporate both heavy tails and the probability of a complete collapse in asset prices. Empirically, we present robustified evidence of bubbles in Bitcoin and Ethereum. Theoretically, we show that liquidity risks may generate heavy-tails in Bitcoin and cryptocurrency markets. Even in the absence of bubbles dramatic booms and busts can occur. We thus sound a timely note of caution.

Suggested Citation

  • Fry, John, 2018. "Booms, busts and heavy-tails: The story of Bitcoin and cryptocurrency markets?," Economics Letters, Elsevier, vol. 171(C), pages 225-229.
  • Handle: RePEc:eee:ecolet:v:171:y:2018:i:c:p:225-229
    DOI: 10.1016/j.econlet.2018.08.008
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    References listed on IDEAS

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    2. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
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    6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    7. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    8. C. Baek & M. Elbeck, 2015. "Bitcoins as an investment or speculative vehicle? A first look," Applied Economics Letters, Taylor & Francis Journals, vol. 22(1), pages 30-34, January.
    9. repec:eee:moneco:v:95:y:2018:i:c:p:86-96 is not listed on IDEAS
    10. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
    11. Cheah, Eng-Tuck & Fry, John, 2015. "Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin," Economics Letters, Elsevier, vol. 130(C), pages 32-36.
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    Cited by:

    1. repec:eee:finana:v:62:y:2019:i:c:p:21-34 is not listed on IDEAS
    2. repec:eee:finana:v:62:y:2019:i:c:p:182-199 is not listed on IDEAS
    3. repec:eee:phsmap:v:525:y:2019:i:c:p:1063-1079 is not listed on IDEAS
    4. repec:eee:finana:v:61:y:2019:i:c:p:143-157 is not listed on IDEAS
    5. repec:eee:ecofin:v:48:y:2019:i:c:p:32-47 is not listed on IDEAS

    More about this item

    Keywords

    Bitcoin; Bubbles; Cryptocurrencies; Econophysics; Liquidity risk;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets

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