“Is Bitcoin a financial bubble”

Research paper by students of Financial university under the Government of the Russian Federation  Ochinnikova E.A, Mamasaidova M.I, Homyakov A.S, Tsvetkov A.Y, Chan Thi Mai An,  Em De Yon and scientific advisor Sr Smirnov Valeriy Valerievich is devoted to the study of price dynamics for bitcoin, the analysis of data and opinions about its past and current price fluctuations. The main purpose of the study is to collect and analyze data on the growth of cryptocurrency and how cryptocurrency can be considered as a financial bubble.

Cryptocurrencies are getting interconnected with the global finance faster than ever before, but their stability as a financial asset and as a means of payment raises questions. This paper focuses on probably the most prominent of all cryptocurrencies – Bitcoin – as its price stability and dynamics over the years has been troubling investors and finance specialists all over the globe. Some of them have voiced suspicions that Bitcoin is a financial bubble. The demand for disclosure of this problem has increased during the last several years, and year 2020 specifically has had an unprecedented rise in the price of Bitcoin, which makes the question of financial bubble more pressing than ever before.

According to European Central Bank, there are many researched methods to forecast asset bubbles.

 The first method is called the Signaling Method. This method defines a specific threshold for each index variable. A warning signal for the possibility of a breakout or collapse in a certain period will be given when these indicator variables reach a certain threshold.

The second method is Discrete Choice. This is a method that uses regression techniques to estimate indicators capable of predicting a burst or collapse. More specifically, this method emphasizes running univariate or multivariate logit/probit regressions and estimates the probability of a burst/collapse occurring over a given period.

There are also a number of other methods that are less popular but are gradually being used more. An example is the “structural” method. It emphasizes the construction of an early warning model based on multivariate linear regressions.

Cryptocurrencies are represented by transactions recorded in a blockchain that can be viewed by any user. This simultaneously means that transactions based on this technology do not depend on government structures and on the official monetary system, and that all financial transactions of each blockchain user can be accessed by any other Internet users. 
Blockchain fundamentally changes the perception of financial transactions, money, and business.

As for the business based on the blockchain (the number of blockchain startups is constantly growing), it is basically much more ethical than any other business, since it is as transparent as possible.

It is noteworthy that immediately after the creation of cryptocurrencies, during the first wave of their popularity, users and ideologists of cryptocurrencies, who called themselves crypto-anarchists, focused on their philosophical component: they justified the meaning of the existence of cryptocurrencies by the possibility of liberation from the power of states and the established financial system.
 Unlike many other investors, crypto-anarchists focused not on the financial opportunities offered by cryptocurrencies, but on their socio-political function.

The main share of the cryptocurrency market (about a quarter) is Bitcoin. Considering the history of the creation of the first cryptocurrency – bitcoin, it should be noted that it was created in 2008 by Satoshi Nakamoto (probably, this is not one person, but a group of people). The first cryptocurrency was launched in 2009, when the development of its protocol was completed.

Bitcoin became the first electronic currency that gained value in the market without concentrating the value in itself and without being backed by existing currencies.

In the end of 2017, on the 23rd of December, Bitcoin reached its all times high of $19’666. Then, in 2020, the pandemic of COVID-19 took place and in March the financial markets collapsed, and crypto currencies were not an exception. Thus, because of this drop, Bitcoin fell by more than 50% and reached its local minimum of $3’850.

 However, the worldwide economic panic was replaced by a sharp growth. For less than one year Bitcoin increased by more than 13’000 %. More and more famous American companies such as Tesla, Microstrategy, Square and others tend to have a huge share of their savings in Bitcoin and get rid of cash. 

One of the reasons for such optimistic views is an increase in the turnover of crypto transactions in the PayPal system as well as record trading volumes and a high level of open interest in bitcoin futures on the Chicago Mercantile Exchange (CME).
Experts look at future development of the situation at contrary angles: some of them predict great boost in the closest years, others treat it as a bubble.

To my mind, Bitcoin still remains extremely volatile asset which very dangerous to invest in. However, it does not mean that nobody should do it. As any other controversial financial instrument, it is very risky, but can bring gigantic yield as well.