A behavioural finance explanation of speculative bubbles: evidence from the bitcoin price development

In 2008 a group of programmers, alias Satoshi Nakamoto, introduced bitcoin. Bitcoin is a cryptocurrency or virtual money derived from mathematical cryptography and is conceived as an alternative to government authorised currency. The founder anticipated, through bitcoin’s construction and his digital mining processes, that bitcoin prices would be relatively stable. However, the recent bitcoin price decline proves that bitcoin is extraordinarily volatile and is not that stable as hoped. Although some scientists have already shown that the fundamental value of bitcoin is zero, the price of bitcoin has reached over 19.000$ in December 2018. Since then, bitcoin prices dropped nearly 70% from their peak value and showed in addition to that the typical trends of a speculative bubble. Hyman Minsky and Charles Kindleberger discussed three different patterns of speculative bubbles. One is when price rises in an accelerating way and then crashes very sharply after reaching its peak. Another is when the price rises and is followed by a more similar decline after reaching its peak. The third is when the price rises to a peak, which is then followed by a period of gradual decline known as the period of financial distress, to be followed by a much sharper crash at some later time. One of the key findings of this study is that all these three patterns occurred during 2017-18 for the bitcoin price. Therefore, the purpose of this paper is to analyse the historical bitcoin prices in context with the typical five-step characteristics of a speculative bubble. Furthermore, each phase of a speculative bubble is explained by a behavioural finance approach and answer the price development of this cryptocurrency. The result is frightening, bitcoin can be seen as a perfect textbook example of a speculative bubble

Bitcoin and stock market indices: analysis of volatility’s clusters during the bitcoin bubble based on the dynamic conditional correlation model

The market of virtual currencies, called cryptocurrency, has grown immensely since 2008 in terms of market capitalisation and the numbers of new currencies. Bitcoin is one of the most famous cryptocurrency with an estimated market capitalisation of nearly $ 69 billion. The fact that Bitcoin prices have fallen about 70% from their peak value and most indices were down double-digit year to date (2018) with a high daily volatility create the appearance that there has to be a correlation. The purpose of this paper is to investigate the contagion effect between Bitcoin prices and the leading American, European and Asian equity markets using the dynamic conditional correlation (DCC) model proposed by Engle and Sheppard (2001). Contagion is defined in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing that the contagion is lower during price bubbles, the main finding indicates the presence of contagion in the different indices among the three continents and proves the presence of structural changes during the Bitcoin bubble. Moreover, the analysis shows that specific market indices are more correlated with the Bitcoin price than others