Owing to the relative youth of the cryptocurrency market, it is often accused of lacking in maturity. Even with institutional investors rushing in, there are grounds for arguing that the Bitcoin-led market is not completely mature. A reason why such doubts exist is due to the inherent volatility of the market, one where a cryptocurrency can surge by over 40% in one day and fall by 25% the next. Such volatility is often a surprise for most traditional market aficionados, many of whom accuse the market of being a bubble.
What’s a bubble though? Simply put, a financial bubble can be defined as a period of uncharacteristically exponential growth, one unwarranted by fundamentals of the asset, followed by a period of serious contraction. Exponential growth followed by serious contraction. This definition might fit the characterization of the cryptocurrency market in 2017-18 to a tee.
This naturally gives rise to the question – Can one predict cryptocurrency price bubbles? Well, that’s tricky. However, a recent paper did claim to find variables that can predict bubbles in the prices of eight different cryptocurrencies.
Checking out the crystal bubble
Among the many findings of the paper, the foremost was that variables such as the VIX Index and Economic Policy Uncertainty [EPU] are distinctly opposite when it comes to predicting bubbles. While high EPU was proven to spur the chances of a cryptocurrency bubble, the VIX Index was found to have a negative correlation with the likelihood of a bubble.
The paper in question also looked at the predictive behavior of variables such as TED-spread, market volatility and volume, and Google search queries, finding that each of these variables affects Bitcoin and the rest of the cryptocurrency market differently.
For instance, it observed that the VIX Index is negatively associated only with Bitcoin and DASH bubbles, and not with the other cryptos (Ethereum, XRP, Litecoin, Monero, XEM, Dogecoin) studied under this research. Further, Google search queries were found to be positively correlated to BTC, ETH Bubbles, while being negatively correlated to DASH and Monero. Finally, the TED-Spread seemed to be affecting Bitcoin and Bitcoin alone.
Simply put, while each of these factors does have some predictive qualities, these vary from crypto to crypto since they affect them differently.
This is the most crucial of observations. Each of these variables affects these cryptocurrencies differently.
Not a homogenous market
This shouldn’t be a surprising finding, but it is because more often than not, research into cryptocurrencies has centered around Bitcoin, the world’s largest cryptocurrency. Why wouldn’t it be? After all, it is the world’s largest cryptocurrency with a market dominance of over 60% and a history of being the Pied Piper to the industry’s altcoins.
But, that’s the clincher there – It has a market dominance of 62%. The rest of the market, 38% of it, is still populated by altcoins that can also…