A Systematic Review of the Bubble Dynamics of Cryptocurrency Prices

Nikolaos Kyriazisa∗ , Stephanos Papadamoua , Shaen Corbetb,c

a
Department of Economics, University of Thessaly, Filellinon, Volos 382 21, Greece
b
DCU Business School, Dublin City University, Dublin 9, Ireland
c
School of Accounting, Finance and Economics, University of Waikato, New Zealand

Abstract

This paper surveys the academic literature concerning the formation of pricing bubbles in digital
currency markets. Studies indicate that several bubble phases have taken place in Bitcoin prices,
mostly during the years 2013 and 2017. Other digital currencies of primary importance, such as
Ethereum and Litecoin, also exhibit several bubble phases. The Augmented Dickey Fuller (ADF)
as well as the Log-Periodic Power Law (LPPL) methodology are the most frequently employed
techniques for bubble detection and measurement. Based on much academic research, Bitcoin
appears to have been in a bubble-phase since June 2015, while Ethereum, NEM, Stellar, Ripple,
Litecoin and Dash have been denoted as possessing bubble-like characteristics since September 2015.
However, this latter group possess little academic evidence supporting the presence of bubbles since
early 2018. An overall perspective is provided based on a robust bibliography based on large
deviations of market quotes from fundamental values that can serve as a guide to policymakers,
academics and investors.
Keywords: Cryptocurrencies; Bitcoin; Systematic Review; Pricing Bubbles.

1. Introduction

Bubbles have existed across many differing investment assets, with research developing across a
number of related strands including information source, contagion effects, the speed of development,
signal processing and the role of algorithm trading and news dissemination through social media.
The reasons for this broad interest are far from difficult to understand as extreme price fluctuations
in investment forms have always attracted considerable academic debate and the interest of investors,
policymakers and regulators. Moreover, sudden upheavals or abrupt decreases in market values of
assets have been of primordial interest for their societal influencing, such as the generation and
escalation of both social and economic disparities.

Unsurprisingly, this has spurred substantial interest in bubble-formation within cryptocurrency

Preprint submitted to Research in International Business and Finance May 26, 2021
markets (Frehen et al. [2013]; Corsi and Sornette [2014]; Vogel and Werner [2015]), especially when
the asset under scrutiny constitutes a new, developing and promising tool that can be used for both
liquidity and reserve management with an intriguing level of appeal to speculative investors seeking
unexploited profit opportunities. Notably, a broad spectrum of alternative perspectives as regards
the definition of bubbles has been brought about. The best-known among them is the asset-pricing
approach that considers assets as investment tools capable of differentiating their nominal value
from their fundamental value in a large extent (West [1987]; Diba and Grossman [1988]). It should
be noted that the nominal value of an asset is defined as the market value by which it can be sold
or bought whereas its fundamental value is lower and generally based on its costs of production.
Continuous increases in the multiplicity through which nominal prices exceed fundamental values
lead to explosive behaviour and the formation of bubbles. Such deviations from fundamental prices
are mainly generated through highly optimistic investor sentiment that thereby lead to an increased
level of aggregate demand for assets. This phenomenon of sharp demand elevation is reinforced if
supply is stable or decreasing, as is found to be the case when considering the majority of digital
currencies.

Digital currencies have been an axis of interest with regards to the presence of a number of
specific characteristics, such as their nature and functions and whether they constitute a commodity
or fiat money. Baur et al. [2018] found that Bitcoin is a hybrid of commodity money and fiat
money. While digital coins employ peer-to-peer (P2P) networks and open-source software in order
to prevent double spending and bypass the need for intermediation by commercial banks (Dwyer
[2015]). Most cryptocurrencies are highly decentralised coins. Determinants of the value of Bitcoin
are the demand for this currency in combination with its limited supply. Nadler and Guo [2020]
estimated the pricing kernel with which users price factors affecting their token holdings, identifying
that blockchain specific risk factors are priced in to the price of cryptocurrencies. Ammous [2018]
argued that only Bitcoin can serve as a store of value, as it is considered more credible than other
virtual currencies, its supply can be predicted and can resist manipulation due to its incumbency in
the cryptocurrency market. Nevertheless, Baur et al. [2018] found that Bitcoin cannot be considered
as a strong safe haven during crises. A complete survey about cryptocurrencies as a financial asset
has been conducted by Corbet et al. [2019]. Symitsi and Chalvatzis [2019] and Akhtaruzzaman et al.
[2019] found statistically significant diversification benefits from the inclusion of Bitcoin which are
more pronounced for commodities.

This paper surveys the key relevant literature in the area of bubble price formation in digital
currencies and provides in the most representative manner the colourful nomenclature in relevant

2
academic papers. A profound understanding of large deviations of nominal prices from fundamental
ones allows an in-depth overview of inflation determinants of cryptocurrency values and also casts
light on price formation of other assets of primary importance. This study aims to ascribe further
foresight into bubble formation matters as a better understanding of this phenomenon is useful not
only for academics, market participants or individuals, but also for society as a whole.

Section 2 presents the most popular definitions of asset bubbles and the most important bubble
formation events in economic history. Section 3 offers a comprehensive review on the most popular
methodological approaches for testing and measuring the bubble character of cryptocurrencies.
Section 4 lays out a survey on the literature about bubble price formation in virtual decentralised
currencies. Finally, in Section 5 discussion of findings and their economic underpinnings takes
place. Tables A1 and A2 in the Appendix provide a brief overview of the studies investigated and
the bubbles detected in these academic papers, respectively.

2. Defining and presenting a brief history of asset bubbles

Bubble formation has been a term that has received a number of alternative though not con-
tradictory definitions throughout the years. A simple definition of bubbles can be presented as
‘systematic deviations of the market value from the fundamental value of the asset’, where the latter
is defined as the net present value of the future cash flows emanating from it. Van Horne [1985]
supported this definition, stating that ‘a balloon might be a better metaphor for certain financial
promotions. It is blown up, to be sure, but not to the extent that it pops. The eventual deflation is
less abrupt.’ Garber [1990] argued that the term ‘bubble is a fuzzy word filled with import but lack-
ing any solid operational definition’ documenting that one should not try to define bubbles as just
financial events, as we have just to date being unable to understand the exact driving forces within.
The author considers that such deviations cannot be explained based on any of the fundamentals.
O’Hara [2008] provided support to such a theory on bubbles, noting that they depend on combina-
tions of the rationality or not of agents and markets. Brunnermeier and Oehmke [2013] identify that
bubbles consist of: a) a run-up phase that leads in formation of bubbles and imbalances; and b) a
crisis phase, where accumulated risk materialises and the crisis breaks out. Moreover, Shiller et al.
[1984] reveals that asset markets are directed by mercurial investors acting on the basis of short-
lived enthusiasms and bubbles. Brunnermeier and Oehmke [2013] described bubbles as dramatic
price increases which lead to bursting, while Kindleberger and Aliber [2011] considered bubbles as
fast increases in the market value of an asset and that the initial upwards spur triggers expectations
of a series of price enlargements. This is what feeds elevated interest about that particular asset

3
and results in higher demand for investment in it. This is the so-called ‘irrational exuberance’ in
investors’ behaviour (Shiller [2015]).

A standard pricing pattern arises for new investment assets, such as digital currencies. When
a new form of liquidity is developed, the first coins of this currency are sold in a very high price.
One should take into consideration that there is an upper limit in the quantity of supply of a large
number of cryptocurrencies, for example Bitcoin will stop being produced when it reaches 21 million
coins. This supply will continue to increase in decreasing steps until 2040 and then will remain at
that level forever (Baur et al. [2018]). Azariadis [1981] and Frehen et al. [2013] consider that the
three most important historic bubbles have been; the Dutch ’tulip mania,’ the South Sea bubble
in England and the collapse of the Mississippi Company in France. These events are considered to
have been the prominent landmarks in the financial economic events history as the vertical ascents
in prices that took place had been phenomenal. Van Horne [1985], based on a large bulk of evidence
regarding financial market anomalies, takes into consideration the possibility of bubbles and manias
and argues that during the tulipmania a single bulb could be sold for many years’ salary. Garber
[1990] believes that the Dutch experience of Tulipmania during the period 1634-7 was characterised
by amazingly high prices of single bulbs of rare and prized varieties of tulips. Emphasis should be
paid in that towards the most intense phase of the Tulipmania in the early 1637, just before the
burst of this bubble, even common tulip varieties skyrocketed with approximately 2,000% increases
in prices within a month.

According to Johannessen [2017], rampant speculation on the stock exchanges in the various
Dutch towns based on the stock prices of tulip bulbs became a frequent phenomenon. It is note-
worthy that the price of such a bulb was between 10 and 25 guilders in 1612 whereas reached
approximately 6,650 guilders 25 years later due to collective optimism in the Dutch market. This
optimism had been the product of institutional innovation (stock exchanges) and product inno-
vation. Johannessen [2017] argued that the motivation for founding South Sea Company was the
refinancing of the massive national debts that the British and French had acquired during the
Spanish War of Succession. In no more than a decade, the share value of South Sea Company had
reached the enormous amount of £200 million. Its rally in prices was based on attracting investors
from France by promising enormous profits in the French colonies in North America. It is widely
accepted that the South Sea bubble (1720) was generated as many investors from the Continent
had purchased South Sea Company shares in London (Brunnermeier and Oehmke [2013]). As there
was not in reality any perspective of significant trade and profits, the company’s value decreased
and fell to lower levels than before the start of the bubble. The Mississippi bubble (1719-20) was

4
the result of Compagnie d’Occident (‘Company of the West’) that John Law created in order to
have the exclusive privileges to develop the vast French territories in the Mississippi River valley
of North America. This company had the monopoly power over the French tobacco and African
slave trades and Law used it for selling its shares to the public in exchange for state-issued public
securities. The mania of the public to sell debt for shares of the company weakened when inflation
rose too high because of over-issuing of public debt. Thereby, the bubble collapsed and triggered a
crash in equity markets in France. Frehen et al. [2013] provide evidence that all three bubbles had
innovation and irrational investor exuberance as key drivers of bubble expectations. They reject
clientele-based theories that attribute emphasis to bubble-riding and short-sales restrictions.

3. Methodological Approaches for Defining, Detecting and Measuring Bubbles

3.1. Main existing literature on Detecting Bubbles

Academic work used for the process of identifying bubbles in asset prices based on fundamental
values, possesses roots in the asset pricing model of Lucas Jr [1978]. This has been the axis on
which a number of important contributors have developed econometric methodologies in order to
test for bubble behaviour in prices. Blanchard and Watson [1982] argue that bubbles can follow
many types of processes and that certain bubbles lead to violation of variance bounds implied by
a class of rational expectations models. Shiller et al. [1984] support that social movements and
habits in specific time periods are responsible for increases in asset prices. Investing incentives and
asset price fluctuations are due to observations of participants in the market and to human nature.
Tirole [1985] reveals that there are three conditions for bubble creation: durability, scarcity and
common beliefs. He argues that scarcity is based on new units having the same price as old ones and
claims that limited supply may prevent bubbles. This could be very intuitive as regards Bitcoin.
Furthermore, he distinguishes between the financial bubble, which depends on market price, and
the real bubble that is established by fundamentals of this market. Notably, he supports that
overlapping generations models should focus on speculative assets rather than money. Evans [1989]
argued that in rational expectations models sunspots and other ‘rational bubble’ solutions present
only weak or no expectational stability and that in linear models there is at most one strongly
expectational stable solution.

Diba and Grossman [1988] support the view that stock prices do not contain explosive price
bubbles, moreover, claiming that it is impossible for negative rational bubbles in stock prices to
exist, thereby if a bubble bursts then there is no opportunity that it will ever restart. Froot and
Obstfeld [1989] focused on rational intrinsic bubbles dependent only on dividends, that is bubbles

5
that derive all their fluctuations from exogenous economic fundamentals but not from extraneous
factors. They find evidence in favour of bubbles in the US stock market that are difficult to
be explained by alternative models. Gurkaynak [2008] documents that asset bubble tests cannot
manage to offer adequate information about the existence or not of bubbles. He finds that inclusion
of model assumptions about time-varying discount rates, risk aversion or structural breaks permit
the appearance of bubbles only in a very weak extent. Furthermore, there is no way to distinguish
bubbles from time-varying or regime-switching fundamentals. Overall, the author argues that when
bubble detection tests indicate the existence of a bubble we could be far from certain that this
bubble exists.

3.2. Definition of Bubbles: Intrinsic versus Extrinsic rational bubbles

Rational bubbles appear when asset prices keep rising due to investors’ beliefs that there will
be a possibility to sell the overvalued asset at a higher price in the future (Flood and Hodrick
[1990]). As investors are aware of the risk of bubble bursting at some future point in time, they
require compensation for bearing that risk which gets higher as time passes because risk becomes
higher. The continuing requirement for higher profits leads to overgrowing of prices and finally the
bubble bursts. Dale et al. [2005] argued that intrinsic rational bubbles are formed when investors
systematically and continuously conduct wrong estimations of asset fundamentals. This is more
common when it comes to advanced technology products where it is more difficult to determine
the exact fundamental value. Crashes are usually the result of informational dynamics after long
periods of price increases have taken place. Extrinsic rational bubbles, also called as ‘sunspots’,
occur when rational investors have to confront large levels of uncertainty concerning the economic
environment. This is what leads investor to ascribe a value - with regards to price prediction to
endogenously determine factors that do not have both a real or significant influence on fundamental
values of assets. The main source of extrinsic rational bubbles is reliance on misinformation that
results in poor management skills.

3.3. Approaches for Detecting and Measuring Bubbles

No consensus is apparent as regards the tracing and measurement of price bubbles. Rational
bubbles could appear in the form of deterministic time trends, as explosive AR(1) processes or
even more complex stochastic processes. Among others, there have been four principal alternative
approaches in order to define bubbles. The first view about defining bubbles is more traditional
and lies on the comparison between the fundamental value and the nominal value of the underlying
asset. It should be noted that the fundamental value is defined as the present value of the payoffs
deriving from the assets since all relevant information has been taken into consideration (Taipalus

6
[2012]). Thereby, the asset-pricing approach considers that bubbles exist when the nominal value
that coincides with market value is not equal to the fundamental value of the asset.

Another approach for modelling the fundamental value is provided by Foster and Wild [1999]
by using the sigmoid (or logistic) curve approach. This methodology is beneficial when aiming
to capture the different phases in the evolution of a bubble, such as the expansion phase, the
inflexion phase and the saturation phase. All three are considered typical phases during price bubble
formation. The expansion phase presents positive growth, the inflexion phase is characterised by
stability whereas the saturation phase represents a fall in prices. Tracing the date of launch of the
saturation phase is what this approach wants to succeed. It is worth noting that the period of
positive growth is in practice not equal to that of negative growth in prices. The main drawback of
adopting the sigmoid curve approach is its doubtful effectiveness in measurement during multiple
bubbles.

A methodology suitable for testing about single or multiple bubbles is offered by the Markov-
switching Augmented Dickey-Fuller (MSADF) unit root test that detects explosive autoregressive
roots. This procedure has been proposed by Hall et al. [1999] in order to track alterations from
non-bubble to bubble regimes. The main drawback of this method is the difficulty in tracing
whether high volatility or explosive autoregressive behaviour exists in regimes. Among the popular
methodologies for detecting price bubbles could be found the Phillips et al. [2014] and Phillips
et al. [2015] procedures. This is about a bubble test based on the assumption that bubbles follow
a mildly explosive behaviour, that is an autoregressive root θ = 1 + gT −m , where g is positive and
m, c parameters lie in the interval between 0 and 1. This test abides by the theory that suggests
differences in tendencies of prices during upwards phases in comparison to tendencies in downswing
periods. Thereby, sub-martingale behaviour in bullish markets is considered to be different from
martingale behaviour in bearish times.

4. Literature on Cryptocurrency Bubble Price Formation

There has a been an increasing number of empirical papers that investigate the bubble price
dynamics in cryptocurrency markets. The majority of them have been investigating price formation
in Bitcoin but also studies on the CRIX index, the remaining digital coins of major importance
and comparisons with national currencies have been conducted. Further issues such as the role of
cybercriminality and illicit behaviour have also been analysed in substantial detail (Corbet et al.
[2019]). To date, it has been identified that cryptocurrencies contain a number of pricing ineffi-
ciencies (Urquhart [2016], Sensoy [2019], Mensi et al. [2019], Corbet et al. [2019]; Ma and Tanizaki

7
[2019]), persistence (Caporale et al. [2018]; Corbet and Katsiampa [2018]), to be correlated or in
isolation from other traded assets (Gil-Alana et al. [2020]; Sifat et al. [2019]; Corbet et al. [2018]),
news response (Aysan et al. [2019]; Flori [2019]; Nguyen et al. [2019]; Nguyen et al. [2019]; Zargar
and Kumar [2019]); derivative development (Akyildirim et al. [2019]); contagion effects (Handika
et al. [2019]; Omane-Adjepong and Alagidede [2019]; Beneki et al. [2019]); evidence of price clus-
tering (Urquhart [2017]; Kallinterakis and Wang [2019]), pricing bubbles (Corbet et al. [2018]),
regulatory ambiguity (Fry [2018]; Shanaev et al. [2020]), and exceptional levels of both complex
and uncomplex fraud (Gandal et al. [2018]). Much concern has been placed on the valuation of
cryptocurrencies, with particular emphasis on placed on pricing efficiency, market dynamics and
the potential presence of a pricing bubble. Hayes [2019] found that the marginal cost of production
plays an important role in explaining Bitcoin prices, while Van Vliet [2018] investigated the role
that Metcalfe’s Law played in the valuation of Bitcoin. Dwyer [2015] found that the use of cryp-
tocurrency technologies and the limitation of the quantity produced can create an equilibrium in
which a digital currency has a positive value. Bedi and Nashier [2020] provide insights into sharp
disparity in Bitcoin trading volumes across national currencies from a portfolio theory perspective.
Panagiotidis et al. [2018] investigated using a LASSO framework, the influence on Bitcoin prices
of factors such as stock market returns, exchange rates, gold and oil returns, the Federal Reserve
and ECB’s rates and internet trends on Bitcoin returns for alternate time periods. Search intensity
and gold returns emerge as the most important variables for Bitcoin returns. Fry [2018] showed
that liquidity risks may generate heavy-tails in Bitcoin and cryptocurrency markets. There have
also been investigations of interactions between cryptocurrencies themselves. Wei [2018] found that
Tether issuance do not impact subsequent Bitcoin returns, however, they do impact traded volumes
using a VAR methodology, which in fact ran contrary to market expectations. While investigating
ICOs, Felix and von Eije [2019] found that there exists an average level of under-pricing of 123% for
USA ICOs and 97% for the other countries examined. Hendrickson and Luther [2017] went as far
as to investigate the process of banning Bitcoin. The authors found that a government of sufficient
size can prevent an alternative currency from circulating without relying on punishments, where
they can ban the cryptocurrency as long as it disseminated sufficiently severe punishments.

The continued evolution of cryptocurrencies and the underlying exchanges on which they trade
has generated tremendous urgency to develop our understanding of a product that has been iden-
tified as a potential enhancement of and replacement for traditional cash as we know it. Bitcoin
has now developed in so far that it now possesses a robust and liquid derivatives market when
compared to a number of other traditional financial products (Corbet et al. [2018]; Fassas et al.
[2020]). As our understanding of FinTech evolves (Goldstein et al. [2019]) and the growing value of

8
blockchain (Chen et al. [2019]), one key area of research focuses on the interactions between cryp-
tocurrencies and other more traditional financial markets. Regulatory bodies and policy-makers
alike have observed the growth of cryptocurrencies with a certain amount of scepticism, based on
this growing potential for illegality and malpractice. Foley et al. [2019] estimate that around $76
billion of illegal activity per year involve Bitcoin (46% of Bitcoin transactions). This is estimated to
be in the same region of the U.S. and European markets for illegal drugs, and is identified as ‘black
e-commerce’. While thorough investigation of the issues surrounding cryptocurrencies continues
to develop, we continue to set out to analyse the potential mechanisms through which these new
products can influence unsuspecting populations. Their potential use by companies attempting to
take advantage of ‘crypto-exuberance’ must be considered (Akyildirim et al. [2020]). This research
has raised much concern about the central rationale surrounding investment in this new investment
asset class, but one fundamental issue has remained, namely, what exactly is the price of one unit
of cryptocurrency? We set out to establish a review of the broad estimates while considering the
broad use of bubble-identifying techniques.

While considering research specifically analysing the potential for bubbles in the markets for
cryptocurrencies, Cheung et al. [2015] use daily Bitcoin data over the period from July 17, 2010 to
February 18, 2014 and adopt the Phillips et al. [2012] methodology in order to examine whether
price bubbles exist in Bitcoin’s biggest exchange up to then, the Mt. Gox. Estimations by the
generalised Supremum Augmented Dickey Fuller (GSADF) statistic reveal that most of the bubbles
do not last for long as their duration does not exceed a few days period. Three very large Bitcoin
bubbles have been detected. The first bubble starts on April 24, 2011 and ends on July 3, 2011. The
second one begins on January 27, 2013 and ends on April 15, 2013. Finally, the third Bitcoin bubble
in Mt. Gox is the largest one as it begins on November 5, 2013 and ends on February 18, 2014. It
can be seen that bubble behaviour lasts for larger time periods as time passes. The burst of the last
bubble is perhaps responsible for the collapse of the Mt. Gox. MacDonell [2014] uses weekly data
covering the period from July 18, 2010 until August 25, 2013 and employs Autoregressive Moving
Average (ARMA) methodologies and the Log Periodic Power Law (LPPL) models by Johansen-
Ledoit-Sornette (JLS) in order to predict crashes. Findings by ARMA methodologies indicate that
investment sentiment as expressed by the CBOE Volatility Index drives Bitcoin prices. It can be
noted that the LPPL model safely predicts the crash that took place in December 2013. Cheah
and Fry [2015] employ daily closing prices about the Bitcoin Coindesk Index spanning the period
from July 18, 2010 to July 17, 2014 in order to perform price modelling and detect the existence of
bubbles. By following Johannessen [2017] they use a price model including a Wiener process and a
jump process in order to control whether the intrinsic rate of return and the intrinsic level of risk are

9
constant. They examine the bubble component as well as run a BDS test to trace bubble behaviour.
Results reveal that a bubble character exists in the Bitcoin market and the random walk hypothesis
is rejected. The speculative character of Bitcoin fed by high volatility and explosive behaviour of
the currency is reinforced by econometric outcomes.

Corbet et al. [2018] employ daily data from January 9, 2009 and from August 7, 2015 until
November 9, 2017 concerning Bitcoin and Ethereum, respectively. The authors attempt to cap-
ture intrinsic bubbles, herd behaviour and time-varying fundamentals in discount factor models
using a rolling-window approach with the Supremum-, the Generalised Supremum and the back-
ward Supremum Augmented Dickey-Fuller specifications. Econometric findings provide evidence
of Bitcoin bubble behaviour around the turn of the year from 2013 to 2014. Moreover, Ethereum
exhibits bubble behaviour in the beginning of 2016 and in the mid-2017. Overall, bubbles in the
currencies investigated do not last for long. Bouri et al. [2019] use daily data about Bitcoin, Ripple,
Ethereum, Litecoin, Nem, Dash and Stellar that span the period from August 7, 2015 until Decem-
ber 31, 2017 in order to study co-explosivity in their markets. Bitcoin’s explosivity is found to lower
Ripple’s explosivity. Moreover, high prices in Ethereum, Litecoin, Nem and Stellar render more
probable the appearance of hikes in Ripple’s market values. Ethereum’s explosivity is reinforced
by Bitcoin, Ripple, Nem and Dash while receives a negative impact by Stellar. When it comes
to Litecoin, there is evidence that Bitcoin, Ripple, Nem, Dash and Stellar feed its bubbling. Five
digital currencies are also found to positively influence the bubble behaviour of Nem and of Stellar.
It can be noted that also lower capitalisation currencies prove to be influential towards larger ones.
Holub and Johnson [2019] investigate the influence that the Bitcoin bubble exerted on Bitcoin’s
peer-to-peer (P2P) market during the bullish 2017 period. They employ daily data that span the
period from January 2017 to June 2018. Thereby, the increasing, the skyrocketing and the bearish
periods in Bitcoin’s market quotes are examined. Furthermore, data of national currencies from 13
advanced and developing economies are used. Emphasis is paid on analysis of publicly available
bid-ask spreads. Results indicate that spreads decline for the US dollar, the Hong Kong dollar, the
dollar of New Zealand, the Swedish Krone and the Singapore dollar. Nevertheless, the Euro, the
United Kingdom pound, the Australian dollar, the Brazilian real, the Norwegian Krone, the Polish
Zloty, the Russian Rouble and the South African Rand do not present significant falls in spreads
while they abide by the thinking that higher Bitcoin prices lead to wider spreads. This presents
credence to currency and country dependency of the bubble’s effect on Bitcoin prices in the P2P
market.

The SADF methodology is used for detecting bubbles by including a sequence of forward recur-

10
sive ADF unit root tests in right tails. In case that there are numerous episodes of booms and busts
due to rapid alterations in market conditions, then the generalised SADF (GSADF) specification is
preferable. This allows changing in starting points and end points of recursive schemes over flexible
windows, thereby it allows right-sided double recursive test for detecting unit roots. Moreover, the
backward SADF (BSADF) enables conducting a supremum ADF test by backward expanding on a
sample sequence with a fixed end point but not a fixed starting point.

Another strand of research on cryptocurrencies focuses on investigations based on the Log-

Periodic Power Low (LPPL) framework. MacDonell [2014] uses weekly data covering the period
from July 18, 2010 until August 25, 2013 and employs Autoregressive Moving Average (ARMA)
methodologies and the Log Periodic Power Law (LPPL) models by Johansen-Ledoit-Sornette (JLS)
in order to predict crashes. Findings by ARMA methodologies indicate that investment sentiment
as expressed by the CBOE Volatility Index drives Bitcoin prices. It can be noted that the LPPL
model safely predicts the crash that took place in December 2013. Bianchetti et al. [2018] employ
daily data of Bitcoin and Ethereum covering the period from December 1, 2016 until January 16,
2018 in order to detect bubbles in their prices. The methodologies adopted are the Log Periodic
Power Law (LPPL) model by Johansen, Ledoit and Sornette (JLS) and the model of Phillips, Shi
and Yu (PSY) and genetic algorithms. To be more precise, the Ordinary Least Squares (OLS), the
generalised Least Squares (GLS) and the Maximum Likelihood Estimation (MLE) specifications of
the JLS model are adopted. Moreover, the two versions of the PSY methodology are employed.
Estimations reveal that a Bitcoin bubble appears in mid-December 2017 and in the first half of
January 2018. When it comes to Ethereum, bubble behaviour is traced in mid-June 2017 and a
weaker bubble sign is detected around January 12, 2018. Wheatley et al. [2018] employ a generalised
Metcalfe’s law in combination with the Log Periodic Power Law Singularity (LPPLS) model in order
to predict bubbles and crashes in the markets of digital currencies. They define bubbles as deviations
of the Market-to-Metcalfe value that they define and document that four bubbles have aroused in
the Bitcoin market with varying height and length among them. These bubbles have taken place by
starting on: August 28, 2012, April 10, 2013, December 5, 2013 and December 28, 2017. Therefore,
these results give credence to the belief that no random walk exists in cryptocurrency markets.

The Log-Periodic Power Law (LPPL) model is based on econophysics and seeks to determine
whether a critical point is reached. It is supposed that bubbles or crashes obey a particular power
law with log-periodic fluctuations. This model predicts the date of occurrence of a bubble or crash
as it contains a component that captures the market’s excessive volatility before a crash.

A range of alternative estimation frameworks have been adopted in order to detect price bubbles.

11
Bouoiyour et al. [2014] employ data of the Bitcoin Price Index (BPI) and the exchange-trade ratio
(ETR) and users’ attractiveness to Bitcoin in order to examine the Granger causality between
Bitcoin’s price and transactions as well as between Bitcoin’s price and investors’ attractiveness.
The data adopted are of daily frequency and span the period from December 2010 to June 2014.
Moreover, it is revealed that bubble behaviour in Bitcoin markets exists as the attractiveness to
Bitcoin influences the Bitcoin Price Index at short- and long-run frequencies and there is a reverse
(feedback) effect at lower frequencies. This cyclical nexus is found not to have duration of a stable
length. Furthermore, Bouoiyour et al. [2016] employ the innovative technique of Empirical Mode
Decomposition (EMD) to analyse and explain the price dynamics of Bitcoin. They use daily data
of the Bitcoin Price Index (BPI) over the period from December 2010 to June 2015 and extract
data into independent Intrinsic Mode Functions (IMFs) and by filtering high frequency (fluctuating
process) from low frequency (slowing varying components) modes. Moreover, Pearson correlations
and variance of components analysis are employed. Findings provide evidence that apart from the
speculative character of Bitcoin also the long-term fundamentals as expressed by the low-frequency
components are major determinants of fluctuations in Bitcoin quotes. Cheah and Fry [2015] employ
daily closing prices about the Bitcoin Coindesk Index spanning the period from July 18, 2010 to
July 17, 2014 in order to perform price modelling and detect the existence of bubbles. By following
Johannessen [2017] they use a price model including a Wiener process and a jump process in order
to control whether the intrinsic rate of return and the intrinsic level of risk are constant. They
examine the bubble component as well as run a BDS test to trace bubble behaviour. Results
reveal that a bubble character exists in the Bitcoin market and the random walk hypothesis is
rejected. The speculative character of Bitcoin fed by high volatility and explosive behaviour of the
currency is reinforced by econometric outcomes. Fry and Cheah [2016] develop an econophysics
model in order to investigate the formation of bubbles in Bitcoin and Ripple. They employ data on
market capitalisation and market share as well as daily closing values of Bitcoin Coindesk Index and
weekly data on Ripple covering the period from February 26, 2013 to February 24, 2015. Events
of exogenous and endogenous shocks in these currencies are taken into consideration. Univariate
and bivariate model representations are used to test for spillover and contagion effects. Evidence
documents that Ripple is over-priced in relation to Bitcoin and that the former exerted a spillover
influence to the latter that exacerbated recent price falls in Bitcoin.

Holub and Johnson [2019] investigate the influence that the Bitcoin bubble exerted on Bitcoin’s
peer-to-peer (P2P) market during the bullish 2017 period. They employ daily data that span the
period from January 2017 to June 2018. Thereby, the increasing, the skyrocketing and the bearish
periods in Bitcoin’s market quotes are examined. Furthermore, data of national currencies from 13

12
advanced and developing economies are used. Emphasis is paid on analysis of publicly available
bid-ask spreads. Results indicate that spreads decline for the US dollar, the Hong Kong dollar, the
dollar of New Zealand, the Swedish Krone and the Singapore dollar. Nevertheless, the Euro, the
United Kingdom pound, the Australian dollar, the Brazilian real, the Norwegian Krone, the Polish
Zloty, the Russian Rouble and the South African Rand do not present significant falls in spreads
while they abide by the thinking that higher Bitcoin prices lead to wider spreads. This gives credence
to currency and country dependency of the bubble’s effect on Bitcoin prices in the P2P market.
Chen and Hafner [2019] investigate whether sentiment-induced bubbles exist in markets of digital
currencies by using daily data covering the period from August 8, 2014 to May 15, 2018. They test
for bubbles using a transition variable and the CRIX index in a smooth transition autoregressive
model (STAR) with regime switching. Moreover, volatility is expressed by a Beta-t-Exponential
Generalised Autoregressive Conditional Heteroskedasticity (Beta-t-EGARCH) model. Estimations
indicate that volatility has a negative nexus with the sentiment index. Multiple periods are detected
in the period from May 2017 to April 2018. It is revealed that volatility is higher during bubble
periods.

In a more recent strand of research, Corbet et al. [2020] employ Generalised Autoregressive
Conditional Heteroskedasticity (GARCH) and Dynamic Conditional Correlations Generalised Au-
toregressive Conditional Heteroskedasticity (DCC-GARCH) methodologies with 5-minute data to
the nexus between Kodak returns and Dow Jones Industrial Average (DJIA) as well as Bitcoin
returns. The period examined spans November 22, 2017 to February 21, 2018 divided into sub
periods. They provide evidence that before the KodakCoin announcement, there was a strong link-
age between Kodak and the DJIA index, whereas a weal one with Bitcoin, Nevertheless, after the
KodakCoin announcement, the connection between Kodak and the DJIA rendered weaker but the
relation of Kodak with Bitcoin was significantly fortified. Kodak’s return volatility also reveals
the closer linkage with risky digital currencies after the announcement. Chaim and Laurini [2019]
investigate whether Bitcoin is a bubble by adopting the strict local martingale theory of finan-
cial bubbles and employing the non-parametric estimator of Florens-Zmirou and the Hamiltonian
Monte Carlo simulation scheme for estimations. Examination is also conducted with the SP500
index, the euro-dollar exchange rate, the gold-dollar prices and the market value of Brent oil for
comparison purposes. It is found that Bitcoin exhibits bubble behaviour only during the period
from January 2013 to April 2014. Cagli [2019] investigate explosive behaviour in the market values
of Bitcoin, Ethereum, Ripple, Litecoin, Stellar, Nem, Dash and Monero by employing daily data
spanning from September 2015 to January 2018. The methodology adopted is based on Chen et al.
[2017]. Evidence indicates that all digital currencies except for Nem present explosive behaviour

13
and exhibit significant pairwise comovement linkages. More specifically, statistically significant bi-
lateral co-explosive relations are detected between the pairs of: Bitcoin-Dash, Ethereum-Litecoin,
Ethereum-Dash, Ethereum-Monero and Ripple-Stellar.

It should also be noted that recent academic work has focused interest on investigating which
model would better fit the examination of cryptocurrency booms and busts. Cretarola and Figà-
Talamanca [2019a] employ a continuous time stochastic model for Bitcoin dynamics. They provide
evidence that bubbles are connected with the correlation between the market attention factor on
Bitcoin and Bitcoin returns being above a non-negative threshold. Thereby, market exuberance is
found to be influential for Bitcoin bubbles. Such bubbles are evident during 2012-2013 and 2017.
Moreover, Cretarola and Figà-Talamanca [2019b] extend the model employed in Cretarola and Figà-
Talamanca [2019a] and allow for a state-dependent correlation parameter between asset returns
and market attention. It is revealed that based on the modified model the correlation between
cryptocurrencies and their market attention can indicate the speed by which a bubble boosts. Both
Pyo and Lee [2019] and Corbet et al. [2020] investigate the impact of FOMC announcements on
Bitcoin returns by conducting regressions. They take into consideration 65 FOMC meetings related
to monetary policy. Findings reveal that the Producer Price Index exerts significant effects on
Bitcoin prices only one day before the FOMC announcement while no significant impacts from
macroeconomic announcements are found in general. Eom [2020] by using Bitcoin data from Korea
and the US and employing Generalised Method of Moments (GMM) estimations support that the
high trading volume and price instability can explain the Kimchi premium. Higher Bitcoin bubbles
lead to a clearer nexus between trading volume and premium. Bubbles are found to grow due to
fundamental uncertainty and higher trading. Moreover, Shu and Zhu [2020] provide evidence that
an adaptive multilevel time series detection methodology based on the LPPLS model and high-
frequency data can effectively detect bubbles. Moreover, it can forecast bubble crashes, even for
short-term bubbles. In another vein, Xiong et al. [2019] verify that bubble estimation based on the
production cost by applying VAR and LPPL models display good predictive capacities. Moreover,
the price-electricity cost ratio (PECR) and the bubble coefficient (BC) are found to be effective
measures. Furthermore, it is argued that the next large Bitcoin bubble is expected to take place in
the second half of 2020, just after Bitcoin’s halving.

Insert Figure 1 about here

Emphasis should be paid in that academic evidence reveals a clearer bubble character in major
cryptocurrencies, especially Bitcoin but also Ethereum, whereas the remaining highly-capitalised

14
digital currencies present price increases in a more modest level. It should be emphasised when the
CRIX index, the Bitcoin Price Index or the Mt.Gox values represent Bitcoin, bubbles are found to
be more intensive. Moreover, one should underline that methodologies based on the SADF provide
evidence of higher or multiple bubbles in cryptocurrency markets.

While considering all of the above research, it is very important to try to define a central estimate
over time as to how estimates of the size of a bubble in cryptocurrency markets vary. While this
research provides a central piece that provides a broad overview of the techniques used to measure
pricing bubbles, we further attempt to provide estimates both over time frequency and by type of
cryptocurrency. In Figure 1, we observe eight examples of monthly cryptocurrency price behaviour
when compared to that of the periods of time in which academic research had pre-defined the
existence of bubble-like properties in each respective market using the techniques earlier outlined
in our research. The collected data used to generate these figures are available in the attached
Appendices. We can clearly observe that each example with the exception of Maidsafecoin and
Monero exhibit sustained warnings with regards to the existence of bubbles far in advance of the
sharp price increases that existed throughout 2016 and 2017. Interestingly, such warnings then
disappeared when the price of each cryptocurrency subsequently collapsed throughout 2017 and
during early 2018. Although there have existed many warnings throughout a variety of reputable
academic sources, it would largely appear that such advice has been broadly ignored. Much of the
research provided in this systematic review considers cryptocurrencies to be an exceptionally volatile
product, exhibiting many behavioural traits that do not appear to be shared within traditional
financial markets.

5. Concluding Comments

The substantial body of evidence that seeks to test for the existence and measurement of the
size of bubble price formation in financial assets has accumulated substantially during the past
decades. There already exists considerable evidence that economic sentiment and speculative mo-
tives combined with overconfidence, trigger significant divergences of asset market values from the
corresponding fundamental values. Bubble-formation has received a wide array of alternative defini-
tions. The majority of these definitions agree with the view that such behaviour is generated within
elevated interest of economic units due to especially favourable conditions that lead to multiple
size of nominal values in relation to the fair value. The asset pricing approach considers assets as
investment tools capable of proving extremely profitable for traders. The highly speculative char-
acteristics of cryptocurrencies and the consequentially increasing popularity of Bitcoin and other
digital coins fuelled the bubble price literature with some very interesting academic debate during

15
recent years. Research interest in cryptocurrency bubbles is increasing substantially due to the
ensuing challenges that high and enduring price alterations bring to the surface. There are a vari-
ety of investigative methodologies preferred across cases where a bubble is singular or when there
are multiple bubbles. Moreover, different detection approaches are preferred in the case that is
mildly-explosive or explosive in nature.

While investing in cryptocurrencies renders an increasingly popular option as prices elevate,

substantial uncertainty remains due to the enormous levels of volatility in both returns and unpre-
dictability, therefore risk. Bubble formation in prices of virtual coins leads to substantial difficulty
in such currencies performing efficiently as a account of unit and store of value, some of the key func-
tions in which much literature has observed substantial weakness within these developing products.
Literature associated with digital currency bubbles indicates that Bitcoin has presented several bub-
ble phases, mostly during the years 2013 and 2017. Other major coins also exhibit several bubble
phases. Most studies employ daily data from free sources but papers employing high-frequency data
from not publicly accessible data sources have also been authored. The most popular methodologies
for detecting bubbles have been the Augmented Dickey Fuller (ADF). Moreover, the Log-Periodic
Power Law (LPPL) methodology is often used in relevant research. Overall, the highly speculative,
volatile and unpredictable character of cryptocurrencies is verified by empirical studies. The present
study contributes to relevant literature by providing an overall perspective of empirical academic
studies of bubble price formation of digital currencies and a road-map for future research. This
could prove a highly valuable tool for investors, speculators, regulators and supervising authorities.

Finally, it is worth asking as to whether the bubble characteristics of digital currencies will
perpetuate in the future without risk of key cryptocurrency assets such as Bitcoin bursting. To
the extent that elevated investor optimism continues and irrational behaviour dominates investing
strategies, prices will most likely remain in an upward trajectory. Virtual currencies created by
monetary authorities (such as the Central Bank Digital Currency, CBDC) or coins attached to
bank deposits or government securities (such as stablecoins) are identified to play a primordial role
in the survival of cryptocurrencies. Should regulation or innovation in digital money strengthen the
‘trust’ of investors regarding digital forms of liquidity, such currencies could enjoy legal tender status,
which could present owners of these products with the ability protect themselves from instability
and frequent upheavals. A tendency towards centralisation of digital currencies could contribute
towards cooling digital bubbles before bursting and leading to further crisis episodes.

16
Bibliography
Akhtaruzzaman, M., A. Sensoy, and S. Corbet (2019). The influence of bitcoin on portfolio diversification and design.
Finance Research Letters, 101344.

Akyildirim, E., S. Corbet, D. Cumming, B. Lucey, and A. Sensoy (2020). Riding the wave of crypto-exuberance: The
potential misusage of corporate blockchain announcements. SSRN Working Paper .

Akyildirim, E., S. Corbet, P. Katsiampa, N. Kellard, and A. Sensoy (2019). The development of bitcoin futures:
Exploring the interactions between cryptocurrency derivatives. Finance Research Letters.

Ammous, S. (2018). Can cryptocurrencies fulfil the functions of money? Quarterly Review of Economics and
Finance 70, 38–51.

Aysan, A., E. Demir, G. Gozgor, and C. Lau (2019). Effects of the geopolitical risks on bitcoin returns and volatility.
Research in International Business and Finance 47, 511–518.

Azariadis, C. (1981). Self-fulfilling prophecies. Journal of Economic Theory 25 (3), 380–396.

Baur, D., K. Hong, and A. Lee (2018). Bitcoin: Medium of exchange or speculative assets? Journal of International
Financial Markets, Institutions and Money 54, 177–189.

Bedi, P. and T. Nashier (2020). On the investment credentials of bitcoin: A cross-currency perspective. Research in
International Business and Finance 51.

Beneki, C., A. Koulis, N. Kyriazis, and S. Papadamou (2019). Investigating volatility transmission and hedging
properties between bitcoin and ethereum. Research in International Business and Finance 48, 219–227.

Bianchetti, M., C. Ricci, and M. Scaringi (2018). Are cryptocurrencies real financial bubbles? evidence from quanti-
tative analyses. Evidence from Quantitative Analyses (February 24, 2018). A version of this paper was published
in Risk 26.

Blanchard, O. J. and M. W. Watson (1982). Bubbles, rational expectations and financial markets.

Bouoiyour, J., R. Selmi, and A. Tiwari (2014). Is bitcoin business income or speculative bubble? unconditional vs.
conditional frequency domain analysis.

Bouoiyour, J., R. Selmi, A. Tiwari, and O. Olayeni (2016). What drives bitcoin price? Economics Bulletin 36 (2),
843–850.

Bouri, E., R. Gupta, and D. Roubaud (2019). Herding behaviour in cryptocurrencies. Finance Research Letters 29,
216–221.

Brunnermeier, M. and M. Oehmke (2013). Bubbles, financial crises, and systemic risk. Handbook of the Economics
of Finance 2 (PB), 1221–1288.

Cagli, E. (2019). Explosive behavior in the prices of bitcoin and altcoins. Finance Research Letters 29, 398–403.

Caporale, G., L. Gil-Alana, and A. Plastun (2018). Persistence in the cryptocurrency market. Research in Interna-
tional Business and Finance 46, 141–148.

Chaim, P. and M. Laurini (2019). Is bitcoin a bubble? Physica A: Statistical Mechanics and its Applications 517,
222–232.

Cheah, E.-T. and J. Fry (2015). Speculative bubbles in bitcoin markets? an empirical investigation into the funda-
mental value of bitcoin. Economics Letters 130, 32–36.

Chen, C. Y.-H. and C. M. Hafner (2019). Sentiment-induced bubbles in the cryptocurrency market. Journal of Risk
and Financial Management 12 (2), 53.

Chen, M., Q. Wu, and B. Yang (2019). How valuable is FinTech innovation? Review of Financial Studies 32,
2062–2106.

17
Chen, Y., P. Phillips, and J. Yu (2017). Inference in continuous systems with mildly explosive regressors. Journal of
Econometrics 201 (2), 400–416.

Cheung, A., E. Roca, and J.-J. Su (2015). Crypto-currency bubbles: an application of the phillips–shi–yu (2013)
methodology on mt. gox bitcoin prices. Applied Economics 47 (23), 2348–2358.

Corbet, S., D. J. Cumming, B. M. Lucey, M. Peat, and S. A. Vigne (2019). The destabilising effects of cryptocurrency
cybercriminality. Economics Letters, 108741.

Corbet, S., V. Eraslan, B. M. Lucey, and A. Sensoy (2019). The effectiveness of technical trading rules in cryptocur-
rency markets. Finance Research Letters 31, 32–37.

Corbet, S. and P. Katsiampa (2018). Asymmetric mean reversion of bitcoin price returns. International Review of
Financial Analysis.

Corbet, S., C. Larkin, B. Lucey, A. Meegan, and L. Yarovaya (2020). Cryptocurrency reaction to FOMC announce-
ments: Evidence of heterogeneity based on blockchain stack position. Journal of Financial Stability 46, 100706.

Corbet, S., C. Larkin, B. Lucey, and L. Yarovaya (2020). Kodakcoin: a blockchain revolution or exploiting a potential
cryptocurrency bubble? Applied Economics Letters 27 (7), 518–524.

Corbet, S., B. Lucey, M. Peat, and S. Vigne (2018). Bitcoin futures - What use are they? Economics Letters 172,
23–27.

Corbet, S., B. Lucey, A. Urquhart, and L. Yarovaya (2019). Cryptocurrencies as a financial asset: A systematic
analysis. International Review of Financial Analysis 62, 182–199.

Corbet, S., B. Lucey, and L. Yarovaya (2018). Datestamping the Bitcoin and Ethereum bubbles. Finance Research
Letters 26, 81–88.

Corbet, S., A. Meegan, C. Larkin, B. Lucey, and L. Yarovaya (2018). Exploring the dynamic relationships between
cryptocurrencies and other financial assets. Economics Letters 165, 28–34.

Corsi, F. and D. Sornette (2014). Follow the money: The monetary roots of bubbles and crashes. International
Review of Financial Analysis 32, 47–59.

Cretarola, A. and G. Figà-Talamanca (2019a). Bubble regime identification in an attention-based model for bitcoin
and ethereum price dynamics. Economics Letters, 108831.

Cretarola, A. and G. Figà-Talamanca (2019b). Detecting bubbles in bitcoin price dynamics via market exuberance.
Annals of Operations Research, 1–21.

Dale, R., J. Johnson, and L. Tang (2005). Financial markets can go mad: Evidence of irrational behaviour during
the south sea bubble. Economic History Review 58 (2), 233–271.

de Sousa, H. R. and A. Pinto (2019). Blockchain based informed consent with reputation support. In International
Congress on Blockchain and Applications, pp. 54–61. Springer.

Diba, B. T. and H. I. Grossman (1988). Explosive rational bubbles in stock prices? The American Economic
Review 78 (3), 520–530.

Dwyer, G. (2015). The economics of bitcoin and similar private digital currencies. Journal of Financial Stability 17,
81–91.

Eom, Y. (2020). Premium and speculative trading in bitcoin. Finance Research Letters, 101505.

Evans, G. (1989). The fragility of sunspots and bubbles. Journal of Monetary Economics 23 (2), 297–317.

Fassas, A., S. Papadamou, and A. Koulis (2020). Price discovery in bitcoin futures. Research in International Business
and Finance 52.

Felix, T. and H. von Eije (2019). Underpricing in the cryptocurrency world: Evidence from initial coin offerings.
Managerial Finance 45, 563–578.

18
Flood, R. P. and R. J. Hodrick (1990). On testing for speculative bubbles. Journal of economic perspectives 4 (2),
85–101.

Flori, A. (2019). News and subjective beliefs: A bayesian approach to bitcoin investments. Research in International
Business and Finance 50, 336–356.

Foley, S., J. R. Karlsen, and T. J. Putnins (2019). Sex, drugs, and Bitcoin: How much illegal activity is financed
through cryptocurrencies? Review of Financial Studies 32, 1789–1853.

Foster, J. and P. Wild (1999). Econometric modelling in the presence of evolutionary change. Cambridge Journal of
Economics 23 (6), 749–770.

Frehen, R., W. Goetzmann, and K. Geert Rouwenhorst (2013). New evidence on the first financial bubble. Journal
of Financial Economics 108 (3), 585–607.

Froot, K. A. and M. Obstfeld (1989). Intrinsic bubbles: The case of stock prices. Technical report, National Bureau
of Economic Research.

Fry, J. (2018). Booms, busts and heavy-tails: The story of Bitcoin and cryptocurrency markets? Economics
Letters 171, 225–229.

Fry, J. and E.-T. Cheah (2016). Negative bubbles and shocks in cryptocurrency markets. International Review of
Financial Analysis 47, 343–352.

Gandal, N., J. Hamrick, T. Moore, and T. Oberman (2018). Price manipulation in the Bitcoin ecosystem. Journal
of Monetary Economics 95, 86–96.

Garber, P. M. (1990). Famous first bubbles. Journal of Economic perspectives 4 (2), 35–54.

Geuder, J., H. Kinateder, and N. Wagner (2019). Cryptocurrencies as financial bubbles: The case of bitcoin. Finance
Research Letters.

Gil-Alana, L., E. Abakah, and M. Rojo (2020). Cryptocurrencies and stock market indices. are they related? Research
in International Business and Finance 51.

Goldstein, I., W. Jiang, and A. Karolyi (2019). To FinTech and beyond. Review of Financial Studies 32, 1647–1661.

Gurkaynak, R. (2008). Econometric tests of asset price bubbles: Taking stock. Journal of Economic Surveys 22 (1),
166–186.

Hafner, C. (2018). Testing for bubbles in cryptocurrencies with time-varying volatility. Available at SSRN 3105251 .

Hall, S., Z. Psaradakis, and M. Sola (1999). Detecting periodically collapsing bubbles: A markov-switching unit root
test. Journal of Applied Econometrics 14 (2), 143–154.

Handika, R., G. Soepriyanto, and S. Havidz (2019). Are cryptocurrencies contagious to asian financial markets?
Research in International Business and Finance 50, 416–429.

Hayes, A. (2019). Bitcoin price and its marginal cost of production: support for a fundamental value. Applied
Economics Letters 26 (7), 554–560.

Hendrickson, J. and W. Luther (2017). Banning Bitcoin. Journal of Economic Behavior and Organization 141,
188–195.

Holub, M. and J. Johnson (2019). The impact of the bitcoin bubble of 2017 on bitcoin’s p2p market. Finance Research
Letters 29, 357–362.

Johannessen, J.-A. (2017). The south sea and mississippi bubbles of 1720. In Innovations Lead to Economic Crises,
pp. 59–87. Springer.

Kallinterakis, V. and Y. Wang (2019). Do investors herd in cryptocurrencies âĂŞ and why? Research in International
Business and Finance 50, 240–245.

19
Kindleberger, C. P. and R. Z. Aliber (2011). Manias, panics and crashes: a history of financial crises. Palgrave
Macmillan.

Lucas Jr, R. E. (1978). Asset prices in an exchange economy. Econometrica: Journal of the Econometric Society,
1429–1445.

Ma, D. and H. Tanizaki (2019). The day-of-the-week effect on bitcoin return and volatility. Research in International
Business and Finance 49, 127–136.

MacDonell, A. (2014). Popping the bitcoin bubble: An application of log-periodic power law modeling to digital
currency. University of Notre Dame working paper .

Mensi, W., Y.-J. Lee, K. H. Al-Yahyaee, A. Sensoy, and S.-M. Yoon (2019). Intraday downward/upward multifractality
and long memory in Bitcoin and Ethereum markets: An asymmetric multifractal detrended fluctuation analysis.
Finance Research Letters 31, 19–25.

Nadler, P. and Y. Guo (2020). The fair value of a token: How do markets price cryptocurrencies? Research in
International Business and Finance 52.

Nguyen, T., B. Nguyen, K. Nguyen, and H. Pham (2019). Asymmetric monetary policy effects on cryptocurrency
markets. Research in International Business and Finance 48, 335–339.

Nguyen, T., B. Nguyen, T. Nguyen, and Q. Nguyen (2019). Bitcoin return: Impacts from the introduction of new
altcoins. Research in International Business and Finance 48, 420–425.

O’Hara, M. (2008). Bubbles: Some perspectives (and loose talk) from history. The Review of Financial Studies 21 (1),
11–17.

Omane-Adjepong, M. and I. Alagidede (2019). Multiresolution analysis and spillovers of major cryptocurrency
markets. Research in International Business and Finance 49, 191–206.

Panagiotidis, T., T. Stengos, and O. Vravosinos (2018). On the determinants of Bitcoin returns: A LASSO approach.
Finance Research Letters 27, 235–240.

Phillips, P. C., S. Shi, and J. Yu (2012). Testing for multiple bubbles.

Phillips, P. C., S. Shi, and J. Yu (2014). Specification sensitivity in right-tailed unit root testing for explosive
behaviour. Oxford Bulletin of Economics and Statistics 76 (3), 315–333.

Phillips, P. C., S. Shi, and J. Yu (2015). Testing for multiple bubbles: Historical episodes of exuberance and collapse
in the s&p 500. International economic review 56 (4), 1043–1078.

Phillips, R. C. and D. Gorse (2018). Cryptocurrency price drivers: Wavelet coherence analysis revisited. PloS
one 13 (4), e0195200.

Puljiz, M., S. Begušić, and Z. Kostanjčar (2018). Market microstructure and order book dynamics in cryptocurrency
exchanges. In Crypto Valley Conference on Blockchain Technology.

Pyo, S. and J. Lee (2019). Do fomc and macroeconomic announcements affect bitcoin prices? Finance Research
Letters, 101386.

Sensoy, A. (2019). The inefficiency of Bitcoin revisited: A high-frequency analysis with alternative currencies. Finance
Research Letters, 28, 68–73.

Shanaev, S., S. Sharma, B. Ghimire, and A. Shuraeva (2020). Taming the blockchain beast? regulatory implications
for the cryptocurrency market. Research in International Business and Finance 51.

Shiller, R. J. (2015). Irrational exuberance: Revised and expanded third edition. Princeton university press.

Shiller, R. J., S. Fischer, and B. M. Friedman (1984). Stock prices and social dynamics. Brookings papers on economic
activity 1984 (2), 457–510.

20
Shu, M. and W. Zhu (2020). Real-time prediction of bitcoin bubble crashes. Physica A: Statistical Mechanics and its
Applications, 124477.

Sifat, I., A. Mohamad, and M. Mohamed Shariff (2019). Lead-lag relationship between bitcoin and ethereum:
Evidence from hourly and daily data. Research in International Business and Finance 50, 306–321.

Su, C.-W., Z.-Z. Li, R. Tao, and D.-K. Si (2018). Testing for multiple bubbles in bitcoin markets: A generalized sup
adf test. Japan and the World Economy 46, 56–63.

Symitsi, E. and K. Chalvatzis (2019). The economic value of bitcoin: A portfolio analysis of currencies, gold, oil and
stocks. Research in International Business and Finance 48, 97–110.

Taipalus, K. (2012). Detecting asset price bubbles with time-series methods.

Tirole, J. (1985). Asset bubbles and overlapping generations. Econometrica: Journal of the Econometric Society,
1499–1528.

Urquhart, A. (2016). The inefficiency of Bitcoin. Economics Letters 148, 80–82.

Urquhart, A. (2017). Price clustering in Bitcoin. Economics letters 159, 145–148.

Van Horne, J. (1985). Of financial innovations and excesses. The Journal of Finance 40 (3), 621–631.

Van Vliet, B. (2018). An alternative model of Metcalfe’s Law for valuing Bitcoin. Economics Letters 165, 70–72.

Vogel, H. and R. Werner (2015). An analytical review of volatility metrics for bubbles and crashes. International
Review of Financial Analysis 38, 15–28.

Wei, W. (2018). The impact of Tether grants on Bitcoin. Economics Letters 171, 19–22.

West, K. D. (1987). A specification test for speculative bubbles. The Quarterly Journal of Economics 102 (3),
553–580.

Wheatley, S., D. Sornette, T. Huber, M. Reppen, and R. N. Gantner (2018). Are bitcoin bubbles predictable?
combining a generalized metcalfe’s law and the lppls model. Combining a Generalized Metcalfe’s Law and the
LPPLS Model (March 15, 2018). Swiss Finance Institute Research Paper (18-22).

Xiong, J., Q. Liu, and L. Zhao (2019). A new method to verify bitcoin bubbles: Based on the production cost. The
North American Journal of Economics and Finance, 101095.

Zargar, F. and D. Kumar (2019). Informational inefficiency of bitcoin: A study based on high-frequency data.
Research in International Business and Finance 47, 344–353.

21
 Figure 1: Bubbles in cryptocurrency markets as identified by academic studies

a) Bitcoin b) Ethereum

c) Dash d) Litecoin

e) Maidsafecoin f) Monero

g) Ripple h) Stellar

Note: The above figures represent selected one hundred day dynamic correlations between a selected sub-set of companies in
the above analysis and our selected cryptocurrency fund.

22
 Appendices

Table A1: Studies about bubble price formation in cryptocurrencies

Authors Currencies Frequency of Time period examined Data Source Methodology Conclusions
examined data

Puljiz et al. [2018] Bitcoin Trade-level March 2013- December Bitfinex, Bit- Scaling exponent in tails using the Hill esti- Volatility and heavy tails
prices by in frequen- 2016 in Bitfinex; July Stamp, BTC-e, mator
Bitfinex, cies from 2010- February 2014 in Kraken, Mt.Gox
BitStamp, 1-minute up Mt.Gox; January 2014-
BTC-e, to-1 day February 2018 in Kraken;
Kraken, August 2011- July 2017
Mt.Gox in BTC-e; September
2011- February 2018 in
BitStamp
Bianchetti et al. Bitcoin; Daily December 1, 2016- Jan- Bloomberg Log-Periodic Power Law (LPPL) by Jo- Yes
[2018] Ethereum uary 16, 2018 hansen and Sornette (1999); OLS, GLS and
MLE with Johansen-Ledoit-Sornette (JLS)
model; Phillips-Shi-Yu (PSY) model with
Backward Supremum Augmented Dickey
Fuller (BSADF and BSADF*)
Bouri et al. [2019] Bitcoin, Daily August 7, 2015- November Coinmarketcap.com generalised Supremum Augmented Dickey Yes
Ripple, 7, 2015 Fuller (GSADF) by Phillips et al. (2013), lo-
Ethereum, gistic regression
Litecoin,
Nem, Dash,
Stellar
Bouoiyour et al. Bitcoin Price daily December 2010- June 2014 www.blockchain.info; Frequency Domain Analysis- Granger Yes
[2014] Index www.quandl.com; Causality by Breitung and Candelon (2006)
23

Google
Bouoiyour et al. Bitcoin Price Daily December 2010- June 2015 www.blockchain.info Empirical Mode Recognition (EMD); Yes, but also determined
[2016] Index Kendall correlation; Pearson correlation by long-term fundamentals
Cagli [2019] Bitcoin, Daily September 1, 2015- Jan- Coinmarketcap.com Methodology of Chen et al. (2017) All except for Nem
Ethereum, uary 31, 2018 and bilateral co-
Ripple, Lite- explosive nexus between
coin, Stellar, Bitcoin-Dash, Ethereum-
Nem, Dash Litecoin, Ethereum-Dash,
and Monero Ethereum-Monero and
Ripple-Stellar
Chaim and Lau- Bitcoin Daily; 5- January 2013- September Blockchain.com Non-parametric estimator of Florens-Zmirou Yes, from January 2013 to
rini [2019] minute 2018 (in sub periods) (1993); Hamiltonian Monte Carlo Simulation April 2014
frequency scheme
Cheah and Fry Bitcoin Coin- Daily July 18, 2010- July 17, Coinmarketcap.com Model with Wiener process and jump pro- Yes, intense bubble char-
[2015] desk Index 2014; January 1, 2013- cess; BDS test based on Brock et al. (1996) acter
November 30, 2013
Cheung et al. Bitcoins Daily July 17, 2010- February Bitcoincharts.com generalised Supremum Augmented Dickey Yes, intense
[2015] traded on 18, 2014 Fuller (GSADF) by Phillips et al. (2013)
Mt.Gox
Chen and Hafner CRIX index Daily August 8, 2014- May 15, StockTwits Smooth Transition Autoregressive Model Yes, multiple
[2019] 2018 Application (STAR); Beta-t-GARCH model by Creal et
Programming al. (2011) and Harvey (2013) in volatility;
Interface (API); Sentiment measures by Nasekin and Chen
thecrix.de (2018)
Corbet et al. KodakCoin; 5-minute fre- November 22, 2017- Febru- Bloomberg; generalised Autoregressive Conditional Yes
[2020] Bitcoin quency ary 21, 2018 CryptoCom- Heteroskedasticity (GARCH) by Bollerslev
pare.com (1986); Dynamic Conditional Correlations
generalised Autoregressive Conditional Het-
eroskedasticity (DCC- GARCH) by Engle
(2002)
Corbet et al. Bitcoin, Daily January 9, 2009- Novem- Historical API’s Backward Supremum Augmented Dickey Yes, clearly
[2018] Ethereum ber 9, 2017 (Application Fuller (GSADF) based on Phillips et al.
Programming (2011), rolling-window Augmented Dickey
Interfaces) Fuller style regression
 Table A1: Studies about bubble price formation in cryptocurrencies

Authors Currencies Frequency of Time period examined Data Source Methodology Conclusions
examined data
de Sousa and Bitcoin, Daily Since the launch of each Coinmarketcap.com Right-tailed Augmented Dickey-Fuller Yes
Pinto [2019] Ethereum, currency until January 27, (RtADF), Rowlling-Augmented Dickey
Ripple, 2017 Fuller (RADF), Supremum Augmented
Litecoin, Dickey Fuller (SADF), generalised Supre-
Monero, mum Augmented Dickey Fuller (GSADF)
Dash, Made-
SafeCoin,
Nem
Geuder et al. Bitcoin Daily March 19, 2016- Septem- Coinmarketcap.com Log-Periodic Power Law (LPPL) model by Yes
[2019] ber 19, 2018 Filimonov and Sornette (2013); Supremum
Augmented Dickey Fuller (SADF) and gen-
eralised Supremum Augmented Dickey Fuller
(GSADF) and Backward Supremum Aug-
mented Dickey Fuller (BSADF) by Phillips
et al. (2015)
Fry and Cheah Bitcoin, Rip- Daily; February 26, 2015- Febru- Coinmarketcap.com; Univariate and multivariate models for bub- Yes
[2016] ple Weekly ary 24, 2015 Rip- bles using Wiener process and jump process
plecharts.com;
Coindesk.com
Hafner [2018] Bitcoin, Daily Since the launch of each Coinmarketcap.com; Spline-GARCH model of Engle and Rangel Yes, in Bitcoin and the
Ripple, currency until December http://thecrix.de; (2008); Supremum Augmented Dickey Fuller CRIX
Ethereum, 31, 2017 CoinGecko (SADF) by Phillips et al. (2011); Exponen-
Bitcoin tial generalised Autoregressive heteroskedas-
Cash, car- ticity (E-GARCH) by Nelson (1991); Thresh-
dano, Lite- old generalised Autoregressive Conditional
coin, IOTA, Heteroskedasticity (T-GARCH) by Glosten
Nem, Dash, et al. (1993)
Stellar,
Monero
24

Hayes [2019] Bitcoin Daily June 29, 2013- April 27, Blockchain.info Ordinary Least Squares (OLS), Vector Au- Yes
2018 toregressions (VAR), marginal cost of pro-
duction model
Holub and John- Bitcoin ex- Daily January 2017 to June 2018 Bitcoincharts; Measurement of the bid-ask spread Yes
son [2019] changes rates Datastream
in relation to
11 national
currencies
MacDonell [2014] Bitcoin Weekly July 18, 2010- August 25, Mt.Gox Maximum Likelihood Estimation (MLE); Yes
2013 Log-Periodic Power Law (LPPL); Autore-
gressive Moving Average (ARMA)
Phillips and Bitcoin; Daily April 2015- September Reddit Hidden Markov Model (HMM) Yes
Gorse [2018] Ethereum; 2016; but Ethereum: Au-
Litecoin; gust 8, 2015- September
Monero 2016
Su et al. [2018] Bitcoin Weekly June 16, 2011- September Wind database Supremum Augmented Dickey Fuller Yes, multiple
30, 2017 (SADF); generalised Supremum Augmented
Dickey Fuller (GSADF) by Phillips et al.
(2013),
Wheatley et al. Bitcoin Daily Bitinfocharts.com Metcalfe’s Law; Ordinary Least Squares Yes
[2018] (OLS); generalised Least Squares (GLS);
Log-periodic Power Law Singularity (LP-
PLS) model
Cretarola and Bitcoin, Daily January 1, 2012- Septem- Coinmarketcap.com Extension of the model in Cretarola and Correlation between cryp-
Figà-Talamanca Ethereum ber 30, 2019 (Bitcoin), Au- Figà-Talamanca [2019b] tocurrencies and their
[2019a] gust 2015- September 2019 market attention can indi-
(Ethereum) cate the speed by which a
bubble boosts
Cretarola and Bitcoin Daily January 1, 2012- January www.blockchain.info Continuous time stochastic model depending Bubble effects in 2012-
Figà-Talamanca 20, 2018 on a market attention factor 2013 and 2017
[2019b]
 Table A1: Studies about bubble price formation in cryptocurrencies

Authors Currencies Frequency of Time period examined Data Source Methodology Conclusions
examined data
Eom [2020] Bitcoin Daily January 2015- September Bitcoincharts.com, Kimchi premium estimation, Generalized Cryptocurrency bubbles
2018, Coinmarket- Method of Moments (GMM) are loud, Fundamental
cap.com, Bank of uncertainty leads to high
Korea trading and speculative
bubbles
Pyo and Lee Bitcoin Daily Monthly July 18, 2010- CryptoCompare.com, Event-driven regression model No significant impacts
[2019] September 10, 2018 www,federalreserve,gov, from macroeconomic an-
www.bls.gov nouncements are found in
general
Shu and Zhu Bitcoin Daily January 11, 2017- April 11, Bitcoincharts.com Adaptive multilevel time series detection The LPPLS confidence in-
[2020] 2019 methodology based on the LPPLS model dicator employed is an ex-
cellent tool for tracing de-
tect bubbles and forecast-
ing bubble crashes
Xiong et al. Bitcoin Daily January 1, 2011- Decem- - Vector Autoregressive Model (VAR), LPPL Models display good pre-
[2019] ber 30, 2018 dictive capacities The next
large Bitcoin bubble is ex-
pected to take place in the
second half of 2020
25
 Table A2: Bubbles in cryptocurrency markets according to studies

Authors Crypto w/ bubble character Period of bubble behaviour

Bouri et al. [2019] Bitcoin October 27, 2015- November 7, 2015

Ethereum February- March 2016
Bitcoin Early January 2017
Dash, Ethereum February 25, 2017- March 25, 2017
Ripple, Ethereum, Litecoin, Nem April- May 2017
Bitcoin Late May- June 2017
Bitcoin August-September 2017
Bitcoin, Ripple, Litecoin, Nem, Late October 2017
Dash, Stellar
Cagli [2019] Bitcoin, Ethereum, Ripple, Lite- Inside the period September 2015- January 2018
coin, Stellar, Dash
Chaim and Laurini [2019] Bitcoin January 2013- April 2014
Corbet et al. [2020] KodakCoin (Launch of KodakCoin) January 9, 2018- February 21, 2018
Corbet et al. [2018] Bitcoin 2013- 2014 turn of the year
Ethereum Early-2016 and mid-2017
Bianchetti et al. [2018] Bitcoin Mid-December 2017
Bitcoin First half of January 2018
Ethereum Mid-June 2017
Bitcoin Mid-January 2018
de Sousa and Pinto [2019] Bitcoin October 20, 2013- December 15, 2013
Bitcoin September 19, 2014- September 23, 2014
Bitcoin October 4, 2014- October 9, 2014
Bitcoin October 30, 2015- November 5, 2015
Bitcoin May 29, 2016- June 23, 2016
Bitcoin October 27, 2016- November 4, 2016
Bitcoin December 22, 2016- January 4, 2017
Ethereum January 15, 2016- February 1, 2016
Ethereum February 4, 2016- February 17, 2016
Ethereum February 23, 2016- March 25, 2016
Ethereum March 28, 2016- April 2, 2016
Ethereum June 13, 2016- June 18, 2016
Ripple November 22, 2014- January 4, 2015
Ripple November 22, 2014- January 4, 2015
Litecoin November 18, 2013- December 1, 2013
Litecoin August 12, 2014- August 21, 2014
Litecoin January 3, 2015- January 24, 2015
Litecoin June 16, 2015- July 10, 2015
Litecoin May 27, 2016- June 7, 2016
Litecoin June 11, 2016- June 21, 2016
Monero March 4, 2016- March 11, 2016
Monero March 20, 2016- April 8, 2016
Monero August 20, 2016- September 29, 2016
Monero December 27, 2016- January 10, 2017
Dash May 10, 2014- June 5, 2014; March 22, 2015- March 27, 2015;
January 17, 2016- January 23, 2016; March 23, 2016- April 9,
2016; May 20, 2016- June 6, 2016; August 7, 2016- September
1, 2016; January 4, 2017- January 8, 2017
MaidSafe July 12, 2014- July 22, 2014; December 4, 2014- December 9,
2014; July 22, 2015- July 30, 2015; February 11, 2016- March
29, 2016
NEM January 18, 2016- January 24, 2016; February 1, 2016- Febru-
ary 17, 2016; March 6, 2016- March 16, 2016; March 25, 2016-
April 3, 2016; June 13, 2016- July 7, 2016
Cheung et al. [2015] Bitcoin April 24, 2011- July 3, 2011
Bitcoin January 27, 2013- April 15, 2013
Bitcoin November 5, 2013- February 18, 2014
Geuder et al. [2019] Bitcoin May- June 2016
Bitcoin End of October- start of November 2016
Bitcoin December 2016- January 2017
Bitcoin Mid-May 2017 to early July 2017
Bitcoin Early August 2017- mid-September 2017
Bitcoin Mid-October 2017- January 2018
Hafner [2018] Bitcoin November 7, 2013- December 18, 2013
Bitcoin November 27, 2017- up to the time of writing
CRIX index May 5, 2017- up to the time of writing
Su et al. [2018] Bitcoin (in the US) Short period in August 2012
Bitcoin (in the US) November 7, 2013- December 12, 2013
Bitcoin (in the US) Early 2017
Bitcoin (in the US) May 18, 2017- September 14, 2017
Bitcoin (in China) February 7, 2013- April 18, 2013
Bitcoin (in China) November 7, 2013- December 12, 2013
Bitcoin (in China) Early 2017
Bitcoin (in China) May 18, 2017- September 14, 2017
Phillips and Gorse [2018] Monero Sep-16
Ethereum January 2016- April 2016
Wheatley et al. [2018] Bitcoin May 25, 2012- August 18, 2012
Bitcoin January 3, 2013- April 11, 2013
Bitcoin October 7, 2013- November 23, 2013
Bitcoin June 8, 2015- December 18, 2016
Bitcoin March 31, 2017- December 18, 2017

26