How does the market bubble?

Question

Before the burst due to massive DDOS attacks on most Bitcoin trade sites, the market price rose from 30 USD in January 2013 to over 250 USD in April.

The mechanism of collapse - the DDOS attacks - is pretty clear and transparent. I wonder though, what mechanisms, machinations, influences or other external sources influenced the market that caused such bubble growth in the first place.

It appears the market is still vulnerable to such (or similar) mechanisms (currently we seem to observe a similar growth), and I'd really like to learn how such events work - how do such bubbles of price appear and grow? Are they natural element of the market, self-propelling machines of enthusiasm of masses, possibly following some global events/trends, or are they created by subtle, or less subtle manipulations?

Answer 1

The short answer is momentum.

Imagine for a second that you are a neutral observer and you see that the price of Bitcoin has been rising over the past few days. Even if you have no reason to think it will continue to rise over the long term, it makes sense for you to buy Bitcoins. After all, it's unlikely that the rise will end just as you buy, and if the price starts to drop, you can always sell. Your buying puts upward pressure on the price, maintaining the momentum.

Now imagine the price is falling. Even if you believe Bitcoins will go up over the long term, it makes sense to sell now. You can always buy your Bitcoins back for less if the price starts to rise. Your selling puts downward pressure on the price, maintaining the momentum.

So, essentially, if the price displays momentum, it's logical to assume it will continue to do so for at least a short period of time, and thus it's logical to perform a transaction that contributes to that momentum.

Negative publicity can start downward momentum. Positive publicity can start upward momentum. Momentum can't really be maintained forever though and when upward momentum stops, everyone fears that downward momentum will begin. They sell to take advantage of the high price and start downward momentum. The same is true when downward momentum ends -- everyone who is bullish over the long term wants to take advantage of the low price. This starts upward momentum.

Just be aware, trading on momentum is essentially a zero-sum game. Everyone's trading profit is someone else's loss. You are probably not "smarter" than everyone else and so are just as likely to be a winner as a loser.

However, the long term upward trend is not a zero-sum game and can mean that there are more winners than losers. Essentially, people who see Bitcoins as an investment are hoping that the Bitcoin system creates real value over the long term.

Answer 2

I suspect it is much the same as with bubbles in other markets---but let me admit that I have little evidence for it. See the famous cartoon that is all over the net.

I think the fact that getting money on and off Bitcoin exchanges tends to be fairly slow might contribute to the bubbles we have seen. As some initial increase in the exchange rate happens to persist, more and more money becomes willing to take the risk of betting on the trend continuing. And after seeing just how much happened just in the week or weeks it took to get verified at a Bitcoin exchange and to move money onto it, many such speculators may become ever more willing to take such a bet. Eventually you end up with a significant fraction of on-exchange Bitcoins in the hands of those who are only willing to keep so many of them because the crazy rate of return is just enough (perceived) compensation for the risk of the bubble bursting.

At that point, the bubble is a self-fulfilling but increasingly fragile prophecy, as any failure to bring in ever more demand, maybe due to some piece of bad news or maybe indeed even just due to some unwelcome DDOS may cause the appreciation to slow below the rate required to keep those high risk speculators' coins from being sold. And when that happens, we have a quick crash, followed by wild swings as traders try to find a consensus what the new value of Bitcoin may be.

Answer 3

Financial bubbles historically are crashes of a market that proved in retrospect to have no underlying value. Despite what novices say, bitcoin has a hefty underlying value quite apart from the speculative measure of its fiat currency exchange value. That value consists of its proven global reach as a cheap, reliable payments remittance vehicle that is immune to fraud or revocation while providing a financial onramp for that half of the world's population that is chronically unbanked. This single characteristic of financial inclusion is of immense "value."

What we see from time to time in the fiat exchange markets for bitcoin (such as Mt.Gox, BTCChina or CaVirtex) is actually no more than a simple "correction," or yesterday, a "sharp correction."

Bubbles burst and disappear, just like a... well, bubble!

Answer 4

I think there are so many different variables in place that it's hard to predict. My opinion is that it's not a bubble. There's a lot of people believing in Bitcoin. Especially with the large positive exposure in China, adoption has increased a lot. So I think the steep curve is just based off of a large adoption rate. But again, who really knows?

Answer 5

It's not really a bubble. If Bitcoin is to become a global currency in the future, it will need to replace quadrillions worth of dollars (and of other currencies). There are only going to be 21 million Bitcoins ever, so each Bitcoin will become very valuable.

Answer 6

This is a prime example.

People who don't know anything at all about Bitcoins, just heard of their price going higher and higher, and are thinking "hey, maybe I should buy some".

And they are probably right... for a while. Until someone ends up being the last one to buy at the highest price before the bubble bursts.

Answer 7

Tо ѕuссееd іn Bіtсоіn іnvеѕtmеnt, уоu muѕt wеаthеr thе inevitable storms оf vоlаtіlіtу. Thе соmрlеtе Bіtсоіn рrісе grарh іѕ a dіzzуіng mооnѕhоt, but nеw Bіtсоіn іnvеѕtоrѕ аrе оftеn ѕhосkеd bу bеаr mаrkеt рhаѕеѕ they fаіl tо рѕусhоlоgісаllу or financially рrераrе fоr.

Bitcoin hаѕ fаllеn аbоut 70% from іtѕ реаk аt thе еnd оf lаѕt уеаr, a рlungе thаt would give mоѕt trаdеrѕ a nosebleed (аnd a hеаdасhе, nаuѕеа, аnd реrhарѕ оthеr ѕуmрtоmѕ). Stіll, thе drор іѕn’t ԛuіtе аѕ dеер аѕ thе last tіmе thе сrурtосurrеnсу tооk аn extended tumblе, whеn іt lоѕt ѕоmе 85% of іtѕ vаluе bеtwееn Dесеmbеr 2013 аnd January 2015, ассоrdіng tо CоіnDеѕk data.

The lаѕt bеаr mаrkеt lаѕtеd fоr 17 mоnthѕ, durіng whісh total cryptocurrency mаrkеt саріtаlіzаtіоn fеll by ~76% from іtѕ аll-tіmе hіgh. If you'd іnvеѕtеd $400 іn BTC аnd $400 іn the bottom 20 аlt-соіnѕ (bу market сар), thеn as оf today's dаtе, уоur іnvеѕtmеntѕ would be worth $11,564 (BTC) and 18,740 (аltѕ) а total оf $30,304 dеѕріtе thе fасt that 16 оut of the bottom 20 alts dіѕарреаrеd іn thе іntеrvеnіng уеаrѕ. I bеlіеvе the lеѕѕоn hеrе іѕ tо ѕрrеаd уоur аlt-соіn investments оut.

Wе саn’t рrеdісt hоw lоng futurе dоwnturnѕ wіll lаѕt, but wе саn learn frоm thе раѕt еxреrіеnсеѕ оf ѕuссеѕѕful Bіtсоіn investors. In this роѕt, wе’ll rеvіеw thе реrіоdѕ whеrе іnvеѕtоrѕ wаіtеd fоr аll-tіmе hіghѕ (ATHs) tо rеturn whіlе оthеrѕ ѕuссumbеd tо рrеѕѕurе tо ѕеll thеіr соіnѕ.

Pеrіоd 1: Jаnuаrу 8 tо Julу 11, 2012 (185 days оr 6 mоnthѕ):

Aftеr аn ATH оf $7.08 оn Jаn 8, BTC lоѕеѕ 40% tо bоttоm аt $4.22, and rеturnѕ tо $7.12 mіd-Julу аnd thеn соntіnuеѕ tо сlіmb.

Pеrіоd 2: Auguѕt 17 tо Dесеmbеr 6, 2012 (111 dауѕ оr 3½ months):

Thе рrісе hіtѕ аn ATH оf $13.35, lоѕеѕ 37% tо bоttоm аt $8.40 аnd rеѕumеѕ еаrlу December.

Pеrіоd 3: Aрrіl 10 to Oсtоbеr 23, 2013 (196 dауѕ оr 6½ mоnthѕ):

Thе рrісе hits аn ATH оf $198.60, lоѕеѕ a whорріng 66% tо bottom at $67.11, аnd rеѕumеѕ 6 mоnthѕ lаtеr іn lаtе Oсtоbеr.

Pеrіоd 4: Nоvеmbеr 30, 2013 tо Fеbruаrу 21, 2017 (1179 dауѕ оr 3 уеаrѕ):

Bіtсоіn’ѕ mоѕt fаmоuѕ bеаr mаrkеt. Thе price hіtѕ аn ATH оf $1,101.59 іn раrt duе tо mаnірulаtеd bоt trаdіng оn thе Mt Gоx еxсhаngе, сrаѕhеѕ аftеr a mаѕѕіvе еxсhаngе hасk tо $191.36, lоѕіng 83% оf its vаluе іn the рrосеѕѕ аnd tаkеѕ ѕеvеrаl уеаrѕ to сrаwl раіnfullу bасk tо іtѕ рrеvіоuѕ hіgh іn еаrlу 2017.

Pеrіоd 5: Junе 11 tо August 5, 2017 (55 dауѕ or 2 mоnthѕ):

After a bіg run-uр durіng 2017, thе рrісе hіtѕ аn ATH of nеаrlу $3,000, drорѕ 36% tо $1,911.58, аnd thеn rесlаіmѕ thе ATH іn early Auguѕt.

Period 6: December 2017 to today, 17 August 2018 (243 days or 8 months)

BITCOIN BEAR MARKETS: HISTORY, PRESENT AND FUTURE