Exploration of bubble properties in cryptocurrencies : a hybrid-study with quantitative models for crash estimation supplemented with industry experts

2018

We employ Supremum Augmented Dickey-Fuller (SADF), the General Supremum Augmented

Dickey-Fuller (GSADF) tests and a Log Periodic Power Law (LPPL) test to Cryptocurrency

Index (CRIX) price data to evaluate cryptocurrencies as a financial bubble. The

tests display bubble tendencies during 2017 and into 2018. Current research within bubble

analysis has not been successfully implemented for cryptocurrency price data. Our hybridapproach

with interviews supplementing the quantitative analysis reflects better the factors

that determine whether or not cryptocurrencies can be labeled a bubble. The greatest challenge

to determining if cryptocurrencies are in a bubble relates to the fundamental value

and the, currently, inadequate estimation method for fundamental value. After assessing

cryptocurrencies as money, we see that this analysis does not align cryptocurrencies as a

large scale payment system. The definition and characteristics of money are complementary,

and it is likely that cryptocurrencies can satisfy these terms better in the future and make

up a bigger part of the financial world in the long term. However, anonymity and limited

acceptability make cryptocurrencies more likely to function as a niche payment system in

the near future. Furthermore, while some cryptocurrencies are superior to fiat money with

respect to aspects such as transaction speed and cost, other areas seem underdeveloped. We

present arguments for and against a bubble and while the arguments against a bubble are

stronger and easier to defend, the arguments for a bubble prevents such a conclusion. The

future development of cryptocurrencies is uncertain, resulting in predictions being proportionally

inaccurate. Despite, we present our conclusion as an addition to the debate regarding

cryptocurrencies being in a bubble or not.