Wednesday, December 6, 2017
As the cryptocurrency Bitcoin hit a high of over $11,000 at one point this past week, more and more market watchers are predicting a crash of some severity. Unlike most of those "gut calls", one study in particular was actually backed up with hard data.
The study, entitled "Bubbles for Fama" was authored by Robin Greenwood, finance and banking professor at Harvard Business School, and Andei Shleifer, economics professor. The researchers found that when an asset has a price run-up of 100% or more in a two-year period, the probability of a crash becomes 50%. When focusing on run-ups of at least 150%, that probability jumps to 80%. Higher than that and a crash is a near-certainty. Of note, the authors focused on the stock market in their study, not cryptocurrencies. But their research included nearly a century worth of historical stock data from around the world, and found similar conclusions regardless of the time period or country.
Bitcoin's run-up over the last two years is nearly 2,500%.
(But who is "Fama", you ask? He's a well-known academic economist who is also a leading proponent of the "Efficient Market Hypothesis", which states that the markets have already efficiently and effectively incorporated all known information into its pricing. But if that's true, there can be no bubbles! So, the authors are offering up their study of genuine bubbles to Professor Fama for his consideration…)