Swiss researchers predict bitcoin market tumble by year-end

bitcoin prices to drop

Swiss researchers predict bitcoin market tumble by year-end

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bitcoin marketsSwiss researchers say bitcoin’s current $118 billion market capitalization could drop by one-third by the end of the year if it follows Metcalfe’s law.


That would put bitcoin’s market cap at an estimated $77 billion compared to today.


ETH Zürich professors of entrepreneurial risk, Spencer Wheatley and Didier Sornette, said in their paper “Are Bitcoin Bubbles Predictable? Combining a Generalized Metcalfe’s Law and the LPPLS Model?”:


“Looking forward, our analysis identifies a substantial but not unprecedented overvaluation in the price of bitcoin, suggesting many months of volatile sideways bitcoin prices ahead (from the time of writing, March 2018).”


Predictor of bitcoin bubbles?


Mt Gox hacked in Feb 2014Wheatley and Sornette say four past bubbles allow them to predict future bitcoin behavior. In June 2011, bitcoin prices crashed by 88% in three months following a high-profile hack on the Mt Gox cryptocurrency exchange. An August 2012 crash began with the discovery of a bitcoin Ponzi scheme and the epic April 2013 crash followed the meltdown and total collapse of Mt Gox.


The most recent bitcoin collapse occurred at the end of December 2017, when the overheated bitcoin market proved unsustainable and dropped precipitously in the first three months of this year.


Fear of missing outThe researchers say there are two key components that trigger the burst of a bitcoin bubble. The first is when “the price exhibits a transient faster-than-exponential growth.” In other words, there’s a herd mentality, driven by a fear of missing out (FOMO).


The second signal is “also decorated with accelerating log-periodic volatility fluctuations, embodying spirals of competing expectations of higher returns (bullish) and an impending crash (bearish). It’s simply, hugely volatile. The market “becomes increasingly unstable, such that any small disturbance can trigger a crash.”


What bitcoin price is right?


In their paper, Wheatley and Sornette write:


 “Focusing on the outlook for bitcoin, the active user data indicates a shrinking growth rate, which a range of parameterizations of our generalized Metcalfe’s law translates into slowing growth in market capitalization. Further, our Metcalfe-based analysis indicates current support levels for the bitcoin market in the range of 22–44 billion USD, at least four times less than the current level. On this basis alone, the current market resembles that of early 2014, which was followed by a year of sideways and downward movement. Given the high correlation of cryptocurrencies, the short-term movements of other cryptocurrencies are likely to be affected by corrections in bitcoin (and vice-versa), regardless of their own relative valuations.”



Wheatley-Sornette bitcoin price research

Figure 1: Left panel: Scatterplot of the bitcoin market cap versus the number of active users, with logarithmic scales. The points become darker as time progresses, and the three latest crashes are indicated by colored points, and arrows indicating the size of the correction. The generalized Metcalfe regression is given in solid red, and with slope forced to be 2 given by the dashed red line. Right panel: Active users (rough black line), again in a logarithmic scale, as a function of time, with linear scale inset. A scaled bitcoin market cap is overlaid with the grey line. The red and dashed yellow lines are the nonlinear regression fits of active users, fitting on different time windows.

In simplest terms, the decreasing growth in the volume of bitcoin users produces downward price pressure and becomes unsustainable and subject to the risk and impact of potential “small disturbances” referenced above.


Wheatley-Sornette research paper


“These four bubbles in market cap are highlighted in Figure 3 and detailed in Table 1—in some cases exhibiting a 20-fold increase in less than 6 months! In all cases, the burst of the bubble is attributed to fundamental events, listed below, for the first three bubbles, which corrected rapidly at the time of the clearly relevant news. The fourth and very recent bubble was much longer, and it is plausible that the main news there was really the $20,000 USD value of bitcoin, i.e., it finally collapsed under its own weight (16). Market participants often lament that crashes are unforeseeable due to the unpredictability of bad news.”


Risk & reward


The upshot, recording to Wheatley and Sornette, is that today’s bitcoin market is very susceptible to a substantial further drop in market capitalization and at risk by even a small event or negative news cycle.


Mark TwainMark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”


In other words, let the fun begin and let the buyer beware.


Editor’s note: Information on Blockcoin Today is not intended as investment advice. Please consult your own investment advisors for appropriate guidance and counsel.


Author: Jeff Domansky, Managing Editor