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Speculative Bubbles and Bitcoin Market: Empirical Investigation by GS-ADF

and MS-ADF Tests

Conference Paper · April 2019

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 Speculative Bubbles and Bitcoin Market:
Empirical Investigation by GS-ADF and MS-ADF Tests
Nour ElHouda BAHRI1
nour.bahri1993@gmail.com

Islem KHEFACHA1,2
Islem.khefacha@fsegma.u-monastir.tn

Imene SAFER CHAKROUN1

imenesafer@yahoo.com

Abstract

Acryptocurrency like Bitcoin utilization has witness a rapid and large public interest. It has
raised profound economic issues. This study tends to test the existence of the bubbles in Bitcoin
markets and to compare the price of Bitcoin with their fundamental value. To this end, we are using
the generalized sup Augmented Dickey-Fuller test (GS-ADF) proposed by Phillips et al. (2015) to
estimate the potential multiple speculative bubbles and the Markov-switching augmented Dickey-
Fuller unit root (MS-ADF) test (Shi [2011]) to locate its occurrence and burst in US Bitcoin
markets. The results show that there are five big explosive bubbles created between 2011 and 2018
in the US market during 66 to 165 days, mainly during periods of sharp increases in bitcoin prices.
As well as, the latter characterized by a price significantly higher than their fundamental value.
Finally, exogenous shocks, including international economic events, mostly the attacks and hackers
from several bitcoin trading platforms, have caused the appearance of bubbles.

Keywords: Bitcoin; Cryptocurrency; Speculative Bubbles; GS-ADF Test, MS-ADF Test.

1
University of Monastir, FSEG Mahdia.
2
University of Sousse, IHEC Sousse, Laboratory Research for Economy, Management and Quantitative
Finance IHEC - University of Sousse, LaREMFiQ.

1
Introduction:

Bitcoin (BTC) is a phenomenon made up of a remarkable media buzz as the first

cryptocurrency to exist most famous compared to other cryptocurrencies over the past decade,
this is for two main reasons namely, its potential extraordinary fluctuations in periods of
extreme price growth as well as regular speculative bubbles. A similar rewrite is that Bitcoin
suffers a price bubble (Krugman [2018], Bloomberg [2017]). The BTC is a cryptocurrency
that has recently become a popular medium of exchange. It has rich and extensive application
domains. It is also a digital asset among peers, which is decentralized and independent of the
influence of the monetary authorities (Nakamoto [2008]), the Blockchain, which records all
transactions between BTC customers (Eyal and Sirer [2014]).

The introduction of the BTC in 2008 coincided with the trough of the global financial
crisis and the BTC found members among the people who lack confidence in the global
financial system (Yermack [2014]). Since its creation in 2009, the price of the BTC follows a
strong fluctuation up and down by positive and negative shocks. Generally, the price of BTC
is higher and higher since 2017 until today. The price of a BTC does not exceed 1 dollar until
April 16, 2011. For me, it exceeded the value of $ 10 the following year. In early 2013, the
price of BTC to increase from $ 100, to be evident within 31 days of the closing of $ 201.50
to $ 1,049.35 per BTC, successively in October and November 2013.

Although the price fell to less than $ 300 over the next three years, on January 3, 2017,
the price reached $ 1,000, and over a month, it exceeded that substantial threshold. As of May
21, 2017, Bitcoin has exceeded $ 2,000. For 6 months, it was valued at $ 7,000 per bitcoin in
the same year 2017. Then fell sharply.

At the beginning of 2018, bitcoin experienced a sharp decline. At least a month, it

reached $ 14,000 in 2018. In January, the value of BTC was worth around $ 18,000.
Beginning in February, its value began to fall to less than $ 10,000. On December 15, 1
bitcoin was valued at 3204 dollars according to CoinMarketCap1 statistics. Compared to the
January exchange rate, this consists of a decline of about 80% of its original value. Price
fluctuation begins on January 1, 2017, suddenly, September 1, 2018, it captures the
remarkable attention received by crypto-currencies in 2017 and early 2018 and is called a
bubble by Corbet et al. (2018). This substantial price change coupled with similar expansion-

1
the market capitalization platform of cryptographic currencies

2
recession models in other digital currencies raises two main issues of interest. First of all, is
this price evolution subject to a crisis and collapse phase a bubble? Second, and most
importantly, does Bitcoin have a fundamental positive value?

The presence of a speculative bubble can explain the drastic increases and rapid price
reversals of Bitcoin at different times of the year. The presence of speculative bubble can
explain why this sudden drop in the price of BTC on the American market. It is often assumed
in the financial press that Bitcoin is the biggest bubble in history2, despite some evidence of
its role as a valuable asset (Bouri et al, 2017).

The purpose of this article is to identify the presence of speculative bubble in the
Bitcoin markets. This is to question the role of unpredictable increases in Bitcoin prices in the
appearance of speculative bubbles. For example, if Bitcoins have characteristics of
speculative bubbles (Cheah and Fry, 2015).

Our article differs from previous work on digital currencies and Bitcoin because it tries
to look for the existence of bubbles in Bitcoin markets and to compare the fundamental value
of Bitcoin through empirical data. We will use several time-series-based econometric
techniques developed to detect the presence of speculative bubbles (explosive behavior) in the
markets that originate: Generalized ADF (GSADF) (Phillips et al, [2015]) to estimate
potential multiple Markovswitching (MS-ADF) (Hall, Psaradakis and Sola, [1999], and Shi
[2011]) to locate its occurrence and burst on the US markets of the BTC, and compare the
price of the latter still with its fundamental value Bitcoin..

The rest of the article is organized as follows: Section 1 presents the review of existing
literature on the subject, Section 2 presents the methodology used, Section 3 presents the data
of the study and gives the empirical results and Section 4 discusses the results of the
discussions and makes recommendations.

2. Literature Review

Reasonable speculative bubbles come into play when an investor buys a good with the
intention of reselling it at a higher price to another buyer who, in turn, intends to resell it
much more. Investors remain in the market despite deviations in the price of its fundamental
value thanks to its high probability of return on investment. In the literature on speculative

2
https://www.cnbc.com/2017/12/14/bitcoin-may-now-be-the-biggest-financial-bubble-of-all-time.html

3
bubbles, several empirical studies have tried to find an answer as to the presence of a
reasonable speculative bubble on the prices of many assets. There have been contradictory
results on the existence or not of speculative bubbles. Blanchard (1979) and Blanchard and
Watson3 (1982) have proved the existence of speculative bubbles; deviations of asset prices
from their core values are possible if all investors are reasonable. In contrast, Diba and
Grossman (1988) insist on the absence of reasonable speculative bubbles4.

The central question about the existence of a reasonable bubble is: how can one detect
empirically the presence or absence of reasonable bubbles? There is a comprehensive
literature on methods for detecting speculative bubbles. Nevertheless, a survey of empirical
tests shows that applied econometric tests give inconsistent results because of the variety of
specification for bubble analysis.

In previous studies, R.Shiller [2014] has shown that "Irrational exuberance is the
psychological basis of a speculative bubble. I define a speculative bubble as a situation in
which news of price increases stimulates the enthusiasm of investors, which spreads by
psychological contagion from person to person, amplifying the narrative that can justify price
increases and attracting a growing class of investors, who, despite doubts about the real value
of an investment, are attracted in part by the desire for the success of others and partly by the
excitement of the player. In addition, the asset pricing approach, which defines bubbles as the
portion of the market price that exceeds the fundamental value of assets, can be adopted (Diba
and Grossman, 1988; West, 1987; Van. Norden, 1996 and Wu, 1997).
Recently, BTC has been touted as a bubble collection market (Swartz 2014, Cheah and
Fry 2015, Fry and Cheah 2016). Grinberg (2011)) explains that BTC is sensitive to irrational
bubbles, which would lead to a collapse of demand in relation to supply. There is a literature
about bubbles in Bitcoin prices. In addition, Dowd (2014) proves that the prices of the BTC
contain speculative bubbles. This conclusion is confirmed by Cheah and Fry (2015), which
indicate that the bubble component of BTC is important. On this basis, Fry and Cheah (2016)
prove that the BTC market contains a significant speculative component and is extremely
volatile.
3
The price stability and properties of Shiller's estimators are criticized by FlavinKleidon (1986) Marsh and
Merton (1986) and Flood, Hodrick and Kaplan (1994).
4
The existence of reasonable speculative bubbles is also discussed in Obstfeld and Rogoff (1983) Shiller (1984),
Tirole (1985), West (1987), Dezhbakhsh and Demirguc-Kunt (1990), Gilles and Leroy (1992), and Rappoport
and White (1993, 1994).

4
 More recently, Blau [2017] argued that the high volatility of Bitcoin was not related to
the high speculative activity of this period. The temporal variation of links reflects external
economic and financial shocks. The ambiguity of the results illustrates the debate over
whether crypto-currencies are a speculative investment asset or a currency. To be considered
as a currency (or money), cryptocurrencies should serve as a means of exchange, serve as a
unit of account and allow storing of value; however, crypto-currencies barely manage to
satisfy all these properties (Bariviera et al., [2017]). Thus, Corbet et al. [2017] examined the
reaction of a wide range of digital assets to the interest rate and QE broadcasts of US federal
funds, reflecting different volatility reactions, indicating a diversified market in which all
currencies are not comparable in Bitcoin. Returns are 26 times more volatile than those of the
S & P 500 Index, suggesting that Bitcoin is a speculative investment vehicle. However,
P.Chaim, Mr. P. Laurini [2018] have found that Bitcoin is much more volatile comparing with
traditional financial assets and displays a distinct level variance dynamics. In doing so, Dowd
(2014) shows that BTC prices appear to contain a considerable speculative component. This
component is investor driven and can potentially mean bubbles (Dale et al, 2005).

In formal terms, Diba and Grossman (1988) note that the volatility of the difference
between the price of assets and the fundamental price is sufficient for bubble detection, and
unit root tests are used to identify volatility. To evaluate the presence or absence of a bubble,
it is necessary to evaluate the fundamentals. However, the evidence of bubbles reported by
these studies remains inconclusive, raising doubts about the empirical validity of these
techniques (Brenner and Kroner, [1995]). In addition, the dates were motivated by the level of
conditional volatility of Bitcoin prices compared to the average unconditional volatility
(Chaim and Laurini (2019)).

Scientific research is surprisingly rare in exploring different types of methodologies for

testing potential bubbles in cryptocurrencies. Garcia et al. [2014] examines feedback loops in
social media at the Bitcoin price, but presupposes the existence of bubbles. Similarly,
Kristoufek [2015] also assumes a bubble. Both are inspired by Shiller et al. [1984]. More
formal tests based on economic fundamentals exist. Alabi [2017] takes a very different
approach, using ideas from the theory of networks to periodically find collapsing bubbles
(P.Chaim, M. P. Laurini [2018]). In addition, we expect the bitcoin market to be characterized
by bubbles (Su et al. [2018]).

5
 The existence of a Bitcoin price bubble can be justified by several factors. The first is
the presence of exaggerated expectations as to the adoption of Bitcoin as a practical
alternative to the payment of traditional monetary assets. Another possible motivation is the
reduction of mining technologies associated with a higher mining difficulty (P.Chaim, M. P.
Laurini [2018]). In addition, Corbet et al. (2018) associate Bitcoin prices with "fundamentals"
for several bubble periods, including the end of 2013 and the second half of 2017.

It is difficult to calculate the fundamental or intrinsic value of a BTC, which is different

from its "fair" value (Garcia et al, [2014]). Although previous studies explore BTC bubbles,
they focus primarily on the price of BTC versus the USD. They neglect specific components
(that is, government management and intervention) that affect prices and lead to different
trends in price movements between US markets. In addition, they are unable to detect
multiple bubbles throughout the period. In addition, Grinberg [2011] postulates that BTC
tends to create irrational bubbles. However, MacDonell [2014] analyzes the price trend of the
BTC and confirms the existence of bubbles at the end of 2013; in particular, he suggests that
speculation is the main driving force behind BTC's values. However, in his opinion, a bubble
occurs during a period of high volatility, which is less convincing Cheah and Fry [2015] test
the presence of speculative bubbles in Bitcoin prices and estimate the fundamental value of
the BTC, but do not locate not the specific points at which bubbles occur.

Previous studies explain the speculative bubble as a deviation of the price of the asset
from its fundamental value by exogenous factors. On the other hand, Froot and Obstfeld
[1991] introduce, for their part, the intrinsic bubbles which are explained solely by the
functioning of the market itself. However, the West [1987] model was designed to detect the
presence of speculative bubbles, and still has econometric gaps5.

The dynamics of the periodic collapse of bubbles was first introduced by Blanchard
(1979). The peculiarity of these models is that the bubbles move between the expansion
phases and the collapse phases. In order to detect this behavior, Driffill and Sola [1998] and
Hall, Psaradakis and Sola [1999] used unit root procedures in the Markovian regime change
models of asset prices is best for a data fit in which the expansion and collapse phases are
employed in different regimes. They generalize the enhanced Dickey-Fuller standard test by
allowing the parameters to switch between different regimes but under the assumption that the

5
Details of the discussion about West's specifications are present in Gürkaynak (2008)

6
error variance is identical from one phase to another. Examining empirically, Shi [2011]
compares the markov model using a constant variance and a variance that varies over time.
These simulations show that the constancy of the variance does not make it possible to detect
the presence of speculative bubbles.

Homm and Breitung [2012] suggest that, compared to other recursive formulas of full-
sample procedures, the procedure created by Phillips et al. [2011] proposed a recursive
method capable and particularly effective as an algorithm for detecting bubble exuberance in
asset price series in real time, capable of serving as an early warning system. Thus, Phillips
and Magdalinos [2007] stated that regardless of the unobservable fundamentals that fueled
observed bubbles, the explosive or moderately explosive behavior of asset prices may be
considered a key indicator of market exuberance during the inflation phase. In addition, the
Phillips et al. [2013] is suitable for any data frequency and considered a formal statistical
estimate of the existence of a bubble. Therefore, this test is more objective for the detection of
bubbles in real time. Another contribution of this study is the development of a new strategy
for determining bubble dates. Specifically, it uses the recursive procedure against critical
values for the standard ADF statistic on the right and uses a first occurrence of crossover time
for origin and date collapse (Phillips et al, [2011], [2012], [2013]).

However, academic literature provides empirical evidence for the presence of bubbles in
Bitcoin (Chueng et al, 2015, Fry and Cheah, 2016, Corbet et al, 2017). In addition, Cheung et
al. (2015), Su et al. (2018), Bouri et al. (2018) Su et al. (2018) apply the methodology of
Phillips et al. (2015), based on Dickey-Fuller augmented sliding-window tests, to time-stamp
bubbles in Bitcoin markets. Several periods of "explosiveness" are highlighted, especially
until 2017. The idea of this approach is to identify the start date of the saturation phase at
which a bubble should burst (Su et al. [2018] ).

2. Theoretical model and methodology

Using the methodology of Phillips et al. [2015] which consists of generalized AD

ADF (GSADF) to detect a number of multiple bubbles. The bubble burst coincides with a
number of major events in the US BTC market. Then, Blanchard and Watson [1982], Shiller
[1984], Tirole [1982, 1985], Evans [1989], Diba and Grossman [1988], Froot and Obstfeld
[1991] improve the econometric methods applied to detect periodic collapse speculative
bubbles. We will present a more detailed framework of the Phillips, Wu and Yu [2011]
(PWY) and Phillips, Shi and Yu [2013] (PSY) models and the empirical technique of
7
estimating the fundamental value of the bitcoin price and analyzing the difference between the
current price and its fundamental value. The most common model for testing the intrinsic
bubble begins with the following equation (Gurkaynak, [2008]):
𝟏
𝑷𝐭 = 𝟏 + 𝒓 𝒇 + 𝑬𝐭 (𝑷𝐭 𝟏 ) (𝟏)
Where𝑬𝐭 : the conditional expectation based on the period t, 𝑷𝐭 is the BTC price during
period t, and 𝒓𝒇 represents the risk-free rate. The solution of this equation (1) can be obtained
using the transversality condition.

𝒊
𝐥𝐢𝐦 𝟏 + 𝒓𝒇 𝑬𝐭 (𝑷𝐭 𝟏 ) = 𝟎 (𝟐)
𝒊→

If the transversality condition is maintained then the single fundamental solution of the
market should be determined by the invisible component on the functioning of the market.
The fundamental value of the asset is given by equation (3) below:

𝒊
𝒇 𝟏
𝑷𝒕 = + 𝑬𝐭 (𝑼𝐭 𝟏 ) 𝑎𝑣𝑒𝑐𝑖 = 0,1,2, …. (3)
𝟏 + 𝒓𝒇
𝒊 𝟎

𝒇
Where, 𝑷𝒕 is the fundamental price of the BTC, and 𝑼𝐭 𝟏 is the invisible component on
the market. On the other hand, if the transversality condition fails, the deviations of the
fundamental value can be explained by incorporating the bubble variable into the price
𝒇
equation. The general solution of equation (1) implies the fundamental value of the asset 𝑷𝒕
and the bubble 𝑩𝒕 as described by equation (4):

𝒇
𝑷𝐭 = 𝑷𝒕 + 𝑩𝒕 (𝟒)

Where 𝑩𝒕 can be explained by the rational expectations of the agents. Bubbles are
defined rationally when investors buy assets at a price above its fundamental value because of
their belief in the high profit they can derive from the sale of the same asset. In other words, a
rational investor is willing to buy an "overvalued" BTC because he thinks there will be
sufficient compensation for the additional payment through the price increases. If investors
expect prices to rise at a rate rf and therefore purchase additional BTCs, the BTC price will
indeed increase and complement the self-fulfilling process. Thus, under the assumption of no
arbitrage, the selling price of the asset is equal to its equilibrium price. Diba and Grossman
[1988]6 have proposed a sub-martingale property and limit arbitrage opportunities and imply
6
Hamilton and Whiteman (1985) and Diba and Grossman (1984) recommend stationarity tests to obtain evidence
of the existence of a speculative bubble.

8
the explosive property of speculative bubbles.
𝟏
𝐁𝐭 = (𝟏 + 𝐫𝐟 ) + 𝑬𝒕 (𝐁𝐭 𝟏 )(𝟓𝒂)

𝑬𝐭 (𝑩𝐭 𝟏 ) = 𝟏 + 𝒓𝒇 𝑩𝒕

This relationship implies that future speculations of agents on the price of assets take
into account the existence of bubbles at period t. As can be seen in equation (5a), the bubbles
increase or decrease at the rate 1+ t. As a result, the price of assets may take positive values as
negative values. Is commonly called rational bubble component. The latter is detected by the
bubble tests described above. Under the condition of transversality: if Bt = 0, there is no
bubble present at and the degree of non-stationarity of the asset price is controlled by
unobservable fundamentals. So, if Bt> 0, there is presence of bubbles so asset prices will be
explosive. Equation (3) requires that any rational investor who is willing to buy BTC should
expect the bubble to rise at a rate rf, Pt=rf, this encourages the behavior of speculative
investors.
Considering the explosive property of the bubble in equation (3), the bubble process
satisfies the following equation (6):

𝑩𝐭 𝟏 − 𝟏 + 𝒓𝒇 𝑩𝒕 = 𝒛 (𝟔)

Where 𝒛 is a random variable whose expected value is zero. That is 𝑬𝐭 𝐢 (𝒛 )for

≥0. Suppose that the bubbles do not exist at the time t given the non negativity of the bubbles
𝑩 ≥ 0, the equation (6) implies that the variable 𝒛 should be greater than or equal to 0,
i.e., 𝒛 ≥ 0. Since the expectation of z is zero, 𝒛 equals 0 with probability 1. Diba and
Grossman [1988] have therefore pointed out that if a bubble exists on the date t + 1, it must
have existed as soon as the price of the asset is negotiated.

Also, it is clear that when a bubble bursts, it can’t restart again. In the following other
works, Diba and Grossman (1988) set a new model of asset prices allowing unobservable
effects of market functioning and capital gains. The general equation of asset price takes the
following form:

𝟏
𝑷𝐭 = + 𝑬𝐭 (𝑼𝐭 𝐢 ) + 𝑩 (𝟕)
𝟏 + 𝒓𝒇
𝒊 𝟎

𝑼𝐭 𝐢 Represents the unobservable variables characterizing the functioning of the

market. Here again, the bubbles satisfy the sub-martingale property. Diba and Grossman

9
(1988) recommend the strategy of using a stationarity test for the price of logarithmic assets
and observable market fundamentals, given the explosive attribute of bubbles. The
conventional stationarity test is based on the standard ADF test or the Phillips-Perron test
(Phillips and Perron, 1988), which presents an alternative and explosive hypothesis. Let's take
the following model:
𝒌

∆𝑷𝐭 = 𝜶 + 𝜷𝑷𝐭 𝟏 + 𝜸𝒊 ∆𝑷𝐭 𝐢 + 𝜺𝐢 , 𝜀 𝑁𝐼𝐷(0, 𝜎 ) (8)

𝒊 𝟏

Or, Pt-i is the BTC logarithmic price, K is the number of delays determined by
significance tests in the empirical application, ϵt is the error term, following an independent
and normal distribution.

Recently, new and improved bubble detection tests have been proposed by Phillips, Wu
and Yu ([2011], hereinafter PWY) and by Phillips, Shi and Yu ([2013], hereinafter PSY).
These strategies are based on recursive and sliding ADF unit root tests that allow us to detect
the existence of a speculative bubble and to date their occurrence. The bubble test (explosive
behavior) is based on a variation of the standard unit root test of the ADF, where the null
hypothesis is β = 1 that means that 𝑷𝐭 𝟏 is a unit root process that is that is, Δ𝑷𝐭 is stationary.
The alternative hypothesis β> 1 implies that 𝑷𝐭 𝟏 is a slightly explosive autoregressive
process, (Δ𝑷𝐭 is non-stationary).

In our study, Homm and Breitung [2012] compared several time series tests for bubble
detection with Monte Carlo simulations and found that the PWY strategy allows relatively
good detection of bubbles that have periodically collapsed and monitor them in real time.
Phillips et al. [2013] have shown, also by Monte Carlo simulations, that the PSY strategy is
superior to the PWY strategy in the presence of several bubbles.

Phillips et al. [2014] have studied the problems encountered in unit root tests of the type
used in the detection of bubbles, but their analysis allowed a null hypothesis with an
asymptotically negligible drift to capture the slight drift of price processes. Their argument
can be explained as follows: if 𝑈 is stationary in first difference, then 𝑃 should be stationary
in first difference in the absence of bubbles. However, if reasonable bubbles exist the
differentiated series 𝑃 is not sufficient to obtain a stationary series. Through empirical studies,
they conclude that asset prices do not contain rational, explosive bubbles. Application of that
performed by applying unit root tests to determine the behavior of asset prices.

10
 Evans [1991] has shown that the classical unit root tests adopted by Diba and Grossman
(1988) are not efficient in detecting speculative bubbles that fall to a non-zero value and
subsequently grow at an explosive growth rate. For this, he proposed a new formulation of the
bubble equation from equation (5a).

𝑩𝐭 𝟏 = 𝟏 + 𝒓𝒇 𝑩𝒕 𝜺𝑩, 𝒔𝒊 𝑩𝒕 ≤ 𝒃 (𝟓𝒃)
𝟏 𝟏
𝑩𝐭 𝟏 = [𝜻 + 𝝅 𝟏 + 𝒓𝒇 𝜽𝒕 𝟏 𝑩𝒕 − 𝟏 + 𝒓𝒇 𝜺𝑩, 𝒔𝒊 𝑩𝒕 > 𝑏 (𝟓𝒄)

Or 𝟏 + 𝒓𝒇 > 1 and 𝜺𝑩, = 𝑒𝑥𝑝(𝑦 − )with𝑦 ~N(0, τ2). In equation (5c) 𝜽𝒕 measures the

probability of bubble collapse and follows a Bernoulli law that takes the value 1 with the
probability 𝜋 and the value 0 with the probability1 − 𝜋, where0 < 𝜋 ≤ 1.

Also, 𝜁 denotes the size of the bubble after bursting: If the size of the bubble is less than
or equal to the threshold 𝑏(𝑖. 𝑒. 𝐵𝑡 ≤ 𝑏), the bubble grows at an average rate 1 + 𝑟. If the size
of the bubble is greater than the threshold 𝑏 (𝐵𝑡 > 𝑏 ) the bubble grows faster at the average
rate 𝜋 − 1(1 + 𝑟). However, the bubble can collapse to a nonzero value 𝜁 of probability 1 −
𝑟 and the process resumes. The bubbles described here are always positive, but they
periodically explode.
More recently, PWY and PSY have suggested methods not only for detecting bubbles
but also, strategies for locating these bubbles compared to standard tests on the entire sample.

Traditional unit root tests (ADF) clearly reject the null hypothesis of unitary root in
favor of the alternative. These results are consistent only in the absence of the periodic
collapse of the bubbles. Moreover, in the presence of the periodic collapse of speculative
bubbles, the classical unit root tests are weakly powerful to detect the existence of bubbles
(ADINGRA and AMBAGNA, [2015])

In the presence of periodic collapse of the bubbles, the price of the asset evolves
between two regimes: a non-stationary regime which corresponds to the phase of expansion of
the bubble and a stationary regime which corresponds to the phase of collapse of the bubble.
To test this type of nonlinear modeling, authors such as Hall, Psaradakis and Sola [1999], and
Shi [2011] implemented ADF tests in Markovian regime change models (MS-ADF). The test
depends on the following equation:

𝛥𝑃 = 𝜇 (1 − 𝑆 ) + 𝜇 𝑆 + [𝛽 (1 − 𝑆 ) + 𝛽 𝑆 ]𝑃 − 1 + [𝜓 (1 − 𝑆 ) + 𝜓 𝑆 ]𝛥𝑃

+ [𝜎 (1 − 𝑆 ) + 𝜎 𝑆 ]𝑒 (9)
11
 With 𝒆𝒕 ~𝑵(𝟎, 𝟏)where is a discrete random variable that takes the values (0 and 1). If
𝑺𝒕 = 𝟎 the process is in regime 1; if 𝑺𝒕 = 𝟏 the process is in regime 2. The Random
Sequence of {𝑺𝒕 } is specified as a homogeneous Markov chain (Hamilton, [1994]) with
transition probabilities:
𝑃𝑟{𝑆𝑡 = 1|𝑆𝑡 − 1 = 1} = 𝑝 ; 𝑃𝑟{𝑆𝑡 = 0|𝑆𝑡 − 1 = 1} = 1 − 𝑝 (10)

𝑃𝑟{𝑆𝑡 = 0|𝑆𝑡 − 1 = 0} = 𝑞 ; 𝑃𝑟{𝑆𝑡 = 1|𝑆𝑡 − 1 = 0} = 1 − 𝑞

This specification will vary depending on the regime. The MS-ADF test is based on the
t-ratio associated with the parameters β1 and β2. Under 𝐇𝟎 : 𝜷𝟏 = 𝟎 𝐚𝐧𝐝 𝜷𝟐 = 𝟎 represents
the unit root, ie the absence of bubbles, whereas under 𝐇𝟏 : 𝜷𝟏 < 𝟎 𝐚𝐧𝐝 𝜷𝟐 > 𝟎 consists of
an explosive root, ie the presence of bubbles. The asset price is stationary in regime 1, which
consists of a collapse phase (𝛃𝟏 < 𝟎), whereas the asset price is non-stationary in regime 2,
which consists of a bubble phase(𝛃𝟐 > 𝟎).

Phillips, Shi and Yu [2011] have proposed new techniques for detecting speculative
bubbles and the dates of onset of these bubbles called Generalized Augmented Dickey-Fuller
sup (GSADF) test. This test was implemented to take into account the weaknesses of the
Augmented Dickey-Fuller sup (SADF7) test in the detection of several bubble phases in the
sample. They compared the SADF model and the GSADF model against sample size and test
power, and the results of their simulations proved the superiority of the GSADF test.

The enhanced generalized Dickey-Fuller (GSADF) test of Phillips et al. [2015] is a

robust technique for identifying multiple explosive periods (Long et al, [2016], Corbet et al,
[2017]). It extends the enhanced Dickey-Fuller sup (SADF) test of Phillips et al. [2011] which
represents by the following equation:
𝑆𝐴𝐷𝐹(𝑟 ) = 𝑠𝑢𝑝 ∈( , ) {𝐴𝐷𝐹 } (11)
SADF has been effective when there is only one bubble episode during the sampling
period. However, there may be several bubbles in the BTC price. Phillips et al. [2012, 2013]
demonstrate that when the sampling period contains multiple episodes of bubbles, the SADF
test may suffer. This is particularly evident in a long sampling period or in rapidly changing
markets where more than one episode of exuberance is suspected. To overcome this weakness
and resolve multiple periods of exuberance and collapse, the GSADF test introduces flexible
window widths into its developments (Phillips et al, [2012, 2013]).

7
The SADF methodology will not be presented as part of this article. For more information see PWY (2011)

12
 The superior performance of the GSADF test is demonstrated in simulations comparing
both tests in terms of size and ability to detect bubbles. Phillips et al. (2015) proposed the
generalized GSADF test by allowing modifications to both the starting point and the ending
point. The GSADF test statistic is:
𝐺𝑆𝐴𝐷𝐹(𝑟 ) = 𝑠𝑢𝑝 ∈( , ) {𝑆𝐴𝐷𝐹 (𝑟 )} (12)

When the regression includes a constant, the GSADF statistic is given by:

⎧ ⎫
⎪ 𝑟 [𝑊(r ) − 𝑊(r ) − 𝑟 ] − ∫ 𝑊(𝑟)𝑑 [𝑊(r ) − 𝑊(r )]⎪
𝑆𝑢𝑝 ( , ) = (13)
( , ) ⎨ ⎬
⎪ 𝑟 𝑟 ∫ 𝑑𝑟 − ∫ 𝑊(𝑟)𝑑 ⎪
⎩ ⎭

Where 𝑟𝑤 = 𝑟2 − 𝑟1 is a standard Wiener process, 𝑤 is a Brownian motion. The

asymptotic distribution of the ADF statistic is a special case of the GSADF equation with
𝑟1 = 0and𝑟𝑤 = 𝑟2 = 1 (Hamilton, [ 1994]) whereas the asymptotic distribution of SADF is
a special case of the GSADF equation with 𝑟1 = 0and𝑟𝑤 = 𝑟2 ∈ (𝑟0,1) (SPY, [2011]).
The details of the demonstration can be found in their articles.
After detecting an explosive behavior using the GSADF test, the start and end points of
the bubble periods can be datestamped via the backward SADF (BSADF) of Phillips et al.
[2015] as follows:
𝐵𝑆𝐴𝐷𝐹(𝑟 ) = 𝑠𝑢𝑝 ∈( , ) {𝐴𝐷𝐹 } (14)

The rolling gap window is set to r2 and the window size changes from r0 to r2. The
explosive periods are defined on the basis of the GSADF Le initial and final point of the
bubble is given by the following equations:
𝜷𝑻𝒓𝟐
𝒓𝒆 = 𝒊𝒏𝒇𝒓𝟐∈(𝒓𝟎,𝟏) {𝒓𝟐: 𝑩𝑨𝑫𝑭𝒓𝟐 (𝒓𝟎 ) > 𝒄𝒗𝒓𝟐 } (𝟏𝟓)
𝜷𝑻𝒓𝟐
𝒓𝒇 = 𝒊𝒏𝒇𝒓𝟐∈(𝒓𝒆 ,𝟏) {𝒓𝟐: 𝑩𝑨𝑫𝑭𝒓𝟐 < 𝒄𝒗𝒓𝟐 } (𝟏𝟔)
CVβTr2is the 100 (1 - βT) % critical value of the ADF statistic based on [Tr2] observations.

3. Practical implementation on the American Bitcoin market

As part of this research, the variable of interest is the daily bitcoin prices collected on
the website data.bitcoinity.org, for the bitcoins most actively traded over the period from 18
Dec. From 2011 to Jan 27, 2019, a total of 1345 daily observations were collected. The
software used for analyzing price data from BTC specifies the US Bitcoin market is EViews
version 10.0.

13
 Table 1 below presents the descriptive statistics on volatility and price levels of Bitcoin.
On average, the price of bitcoin is very expensive (1820.739 USD) in the US market with an
average volatility rate of 6% per day. The average daily transaction volume equals 139840.8
BTC. The average power of the total calculation supporting the Bitcoin network is 6.5 million
Peta-hashes / s8, with a maximum equal to 60 million Peta-hashes / s.

Table 1: Bitcoin Descriptive Statistics

Volatility BTC BTC block size No.Transact Price

per day hashrate (bytes) ions (per BTC
(th /s) day)

Mean 6.355717 6505799. 0.495583 139840.8 1820.739

Median 0.921443 353241.7 0.420193 108047.0 431.9000
Maximum 154.6350 60089527 1.218455 425008.0 19289.79
Minimum 0.003350 6.757850 0.012551 4708.000 2.290000
STDE 15.48790 13447805 0.360020 101705.3 3150.851
Skewness 4.653712 2.293294 0.196289 0.411268 2.350396
Kurtosis 29.60655 7.064243 1.510788 1.938472 8.695231

Jarque-Bera 44196.11 2104.637 132.9236 101.0659 3056.127

Probability 0.000000 0.000000 0.000000 0.000000 0.000000

Sum 8484.882 8.75E+09 666.5598 1.88E+08 2448894.

Sum STDE. 319993.4 2.43E+17 174.2019 1.39E+13 1.33E+10

Observations 1335 1345 1345 1345 1345

The skeweness and Kurtosis coefficients give an indication of the dispersion of the
price series. The skeweness is positive indicating that the distribution is skewed to the right,
the block size, and the number of trades is concentrated on the left of the mean with extreme
values right of the mean. Moreover, the Kurtosis coefficient is greater than 3 on the volatility
of BTC, on their price, and on BTC hash rate indicating a high probability for extreme values.
The strong values of kurtosis are accepted in the literature as the presence of bubble (Camerer
[1989], Lux and Sornette, [1999]). In addition, the probability of the Jarque-Bera test for all
the variables is equal to 0.000 <0.05, so we reject the null hypothesis Ho of normality of the
residues.
The econometric results of the unit root test in the Markov model with a change of
regime are shown in Table 2. The table presents two distinct regimes: In regime 2 captures the
collapse phase of speculative bubbles. Comparing the z-statistic with the 1.96 threshold
(1.343502 <1.96), we reject the null hypothesis of unit root on the bitcoin market at the 5%

14
8
This is a unit of measure for the hash rate, which consists of computing power on the bitcoin network exceeding 1,000,000
GH / seconds over the weekend. For example, the hash rate was 914,000 GH / s, ie 914TH / s, ie 0.914 PH / s.

threshold. Then, the alternative speculative bubble hypothesis on the Bitcoin market is
accepted. In addition, regime 1 captures the expansion phase of speculative bubbles. In this
regime, the null hypothesis of unitary root is rejected against the alternative (stationarity) on
the Bitcoin market at the threshold of 10% (2.374786> 1.96). The value of the coefficient β1
is very high, which indicates that the return to equilibrium is carried out with a high speed.
Table 2: Markov model with regime change on Bitcoin price

𝜷𝟏 𝝈𝟏 z-Statistic p-valus 𝒆𝒅𝟏

Regim 1: 4159.691 1751.606 2.37478 0.0176 3.277726
regime stationary
(Bubble expansion phase) > 1,96
𝜷𝟐 𝝈𝟐 z-Statistic p-valus 𝒆𝒅𝟐
Regim 2 : 2352.651 1751.134 1.343502 0.1001 165.1117
regime explosive
(Bubble Collapse Phase) < 1,96
P11 0.823178 0.451025 1.825126 0.0680 -
P22 -5.100548 0.355575 -14.34449 0.0000 -

Table 3: Constant transition probabilities:

𝑷(𝒊, 𝒌) = 𝑷(𝒔(𝒕) = 𝒌 | 𝒔(𝒕 − 𝟏) = 𝒊)

K
I 1 2
(1) Bubble Collapse Phase 0.694910 0.305090
(2) Bubble expansion phase 0.006057 0.993943

The results in Table 3 also show a strong asymmetry in the Bitcoin price series. We note
that the probability of remaining in a phase of bitcoin price collapse is 0.69 against 0.99 of its
probability of remaining in a bubble phase. In other words, the probability of being in a
bubble phase is greater than the probability of ending up in a collapse phase. As a general
rule, in the Bitcoin market, the probability of remaining in the price increase phase is greater
than that of remaining in the downward phase.

The results of the model allow to give the duration of a regime to another, although,
episodes of lower prices on the Bitcoin market last on average three days before rising while
the phases of price increases last on average 165 days (Table 2).

15
 These results highlight that there is a wide variety of factors that impact the value of
Bitcoin. The first factor, the supply and demand of bitcoin, is not very influential but is a
quasi-way to affect the price in the long run. In the case of media influence, the change is
more important leading to speculative trading, market power and the importance of exogenous
factors (exogenous shocks, including foreign or domestic economic events) that contribute to
keep the price of bitcoin high enough on the market. The graph 1 below gives the probability
that the price belongs to phases of increase and phases of decline especially between the
periods of 24/09/2017 (1100) until 27/01/2019 (1346).
Graphic 1: Probability of price rise and fall of Bitcoin
Filtered Regime Probabilities Filtered Regime Probabilities
1.0 1.0

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0.0 0.0
250 500 750 1000 1250 1000 1050 1100 1150 1200 1250 1300

P(S(t)= 1) P(S(t)= 2) P(S(t)= 1) P(S(t)= 2)

We consider that an observation is classified in the speculative bubble regime if its

probability is greater than 0.5 (This criterion was retained in Araujo [2014]. According to this
criterion we can locate several phases of speculative bubbles on the Bitcoin market.

The analysis revealed the presence of five phases of speculative bubbles between 2011
and 2019. The phases of collapse of Bitcoin prices remain quite low over the period. It turns
out that according to the Markov test, speculative bubbles are present on the Bitcoin market.
We also note that this market has periodic collapses of Bitcoin prices. In addition, the duration
of the collapse of Bitcoin prices in all markets remains quite low.
The implementation of the SADF and GSADF unit root tests on the Bitcoin market,
which is part of our study presented in Table 4 below, makes it possible to prove the existence
of speculative bubbles on the Bitcoin market at the 5% threshold.

16
 We then use the SADF and GSADF tests to determine the BTC price speculative bubble
periods, and to compare the sequences of the SADF statistics with the critical values of the
GSADF sequences at a critical threshold. The critical values of the GSADF test sequence
were obtained from Monte Carlo simulation with 1000 replications.
The analysis of the results makes it possible to deduce that there are bubbles in the USD
price of the BTC. In Table 4, we reject the null hypothesis of H0: r = 1 at the critical
significance value of 1% (16.90031> 1.170645), where 16.90031 is the SADF statistic for the
complete data set. The results show that the price of the BTC contains explosive sub-periods.
Therefore, we conclude that there is significant evidence of exuberance in the price of the
BTC on the basis of SADF testing; specifically, we can affirm the possible presence of
bubbles.

The SADF test is a way of detecting explosive behavior because it tests additional
subsamples of data. SADF test results are estimated with 95% confidence intervals. The start
date of a bubble indicates the first observation where the SADF statistic is greater than the
critical value, while the end date of a bubble is defined as the first observation after that date
when the SADF statistic is less than the critical value. Phillips et al. [2012, 2013] demonstrate
that when the sampling period contains multiple episodes of bubbles, the SADF test may
suffer. This is particularly evident in a long sampling period or in rapidly changing markets
where more than one episode of exuberance is suspected.
Table 4: SADF and GSADF test results
Test SADF Test GSADF
t-Statistic Prob.* t-Statistic Prob.*

SADF/GSADF 16.90031 0.0000 16.90031 0.0000

Test critical values**: 99% level 1.170645 2.412364
95% level 0.635231 1.398713
90% level 0.400956 0.809519

*Right-tailed test
**Critical values are based on a Monte
Carlo simulation (run with EVIews)

Phillips et al. [2013] confirm that the mobile sample GSADF surpasses the SADF test
based on increasing sample size to detect explosive behavior, especially during multiple
bubble episodes, and rarely generates false alarms because the GSADF test evaluates
additional subsamples of the series. Therefore, we can deduce that there is evidence of
multiple bubbles in the BTC market.

17
 Like the SADF test, we reject the null hypothesis at the critical significance value of 1%
(16.90031> 2.412364) of the GSADF test, which is priced in USD. More precisely, we can
identify five bubbles. The date of the beginning of a bubble indicates the first observation
where the GSADF statistic is greater than the critical value, while the date of the end of a
bubble is defined as the first observation after this date that the GSADF statistic is lower than
the critical value at the critical value.
Graphic 2: Localization of speculative bubbles by the GSADF price (USD) test of
the BTC. Note: The upper curve represents the price of the BTC. The median curve is
the critical value at 95%. The lower curve represents the GSADF statistic.
GSADF test

20,000

15,000

10,000

5,000

20
0
15

10

-5
250 500 750 1000 1250

Backwards SADF sequence (left axis)

95% critical value sequence (left axis)
PRICE_BTC (right axis)

Based on Graphic 2, we observe that there are five BTC bubbles during the sampling
period in the US Bitcoin market. The first occurs and ends quickly from June 12, 2011 to
August 3, 2012, 66 days. Priateat409 said it no longer accepts payment in bitcoins, thus
repressing the price up. The exchange of Mont.Gox10 may have caused the outbreak of the
first big bubble and other security difficulties.

We also identify two bubbles in 2013. The first comes on February 7 and bursts on
April 18, for duration of nearly three months (a lifetime of 79 days.). During these months of
inflation, governments are trying to put in place regulatory rules. On the 16th of March,
Cyprus made a hot-up on the savings account of the local banks. This bubble implodes of
70% following a day of stop of the quotations of the changers Mont.Gox. The second begins
18
9
A commercial website in the United States
10
Mt Gox, a cryptocurrency exchange in Japan, was the largest bitcoin exchange in the world, which was
recently bankrupt. Following an internal fraud that resulted in the misappropriation of 650,000 bitcoins for a
counter value of about 360 million US dollars.
on November 7th and collapses on December 12th. During these months of bubble inflation,
the authorities of the world are taking more and more seriously the fluctuations of bitcoin by
trying to frame it. This strengthens its credibility and economic status to the state. The media
reveal keeping investors interested in this asset until collapse (-84%).
Soaring prices can be attributed to the economic crises in Spain and Cyprus; in
particular, the credit ratings of both countries fell to the rank of junk securities. In the face of
growing uncertainty about the future of Cypriot banks, investors seeking to avoid taxes and
locating other tax havens for their assets exchanged their government-guaranteed currencies
for BTCs, pushing volumes and securities values upwards transactions at unprecedented
levels (Cohan, [2013]).
As European countries struggle to recover from the financial crisis, more and more
investors seem to be losing confidence in traditional currencies and are turning to the BTC as
an alternative currency, as evidenced by the explosion in the value of the BTC (Plassaras,
[2013]). Demand for BTC in some European countries has become too high, leading to higher
prices worldwide.
In addition, the BTC was considered a legal tender, so that the specific policy risk is
reduced. Specifically, the US government has regulated BTC trading to prevent money
laundering (Tsukerman [2015]). FinCEN11 has announced measures to strengthen the
surveillance of money laundering activities to include companies that trade BTCs (Satter,
[2013]).
As a result, investors have increased their confidence and enthusiasm in the BTC
market. In addition, another factor causing a price increase can be directly attributed to the
BTC. Thus, the BTC has the characteristic that the reduction in value to half (1/2) during the
four years. The year 2013 marks the beginning of the decadence and a delicate period to
invest in the BTC. Investors buy the BTC fanatically using their excess cash. Finally, the
regulation shocked the BTC market and prices briefly dropped, contributing to the bursting of
the bubble (Cheah and Fry, 2015).

The next bubble occurs in early 2017. The price of the BTC continued to rise in 2016
due to the development of Blockchain technology, which led to the expected appreciation of
the BTC. In other words, this price increase is due to the "WannaCry"12 hacker attack. In
addition, a growing number of people are focusing on the development of the Blockchain,

19
11
Treasury Financial Crimes Enforcement Network
12
More specifically, on May 12, 2017, there was the "WannaCry Bitcoin virus" around the world, which hacked
users over the Internet.

boosting the price of the BTC. The BTC is considered a subversion of the underlying
technology of the financial sector and applied to the securities, banking, insurance and other
financial sectors (Crosby et al, [2016]).

This bubble bursts because PBC (People's Bank of China) emphasizes that the BTC is
a particular virtual product that can’t be used as a currency in circulation. In response, BTC
prices fell by more than 10%. BTC is a way for speculators to pursue short-term interests.
Thus, the price is easily manipulated by speculators, contributing to a high speculative risk.
Then, on September 4, 2017, the PBC issued a notice regarding the prevention of financial
risks related to the issue of tokens and eliminated any BTC exchange. It should be noted that
the PBC's ban on BTC trading triggered a huge panic among speculators and even influenced
the US market in 2017. Thus, we detect a fourth 106-day bubble on May 18, 2017 which
collapse September 14th as a result of this announcement.

Finally, at the end of 2017, the last long bubble collapsed with shocking intensity,
removing 60% (until February 2018) of the market capitalization of cryptocurrency measured
since its peak in December 2018 with duration 165 days of life. This bubble shares some of
the criteria: it was each time a technological innovation for the time. We also notice that
bubbles are also linked to the appearance of a new financial technique. Bitcoin complies with
these two standards, which add to their volatile nature.

It is very difficult to determine the fall in the price of Bitcoin which suddenly causes
the fall of financial assets, bitcoin or other. There is no clear theory today. The attacks,
infiltration and hacks of many Bitcoin trading platforms have certainly played a triggering
role. There will most likely be other bubbles related to virtual currencies, bitcoin or other
(Kim Oosterlinck [2018]).

After calculating economically and rationally calculated ratios, we then use these
measures to detect and datestamped the bubbles. The results of the GSADF test are shown in
Graphic 3. The shaded areas, which represent explosive episodes, indicate several periods of
explosive13 of Bitcoin. This may suggest irrational investments (Baker and Ricciardi, [2014]).

13
Following Etienne et al. (2014), an explosive period must last at least three days to be considered explosive.

20
 Graphic 3: Datestamping of Bitcoin Bubbles

25000 1200

1000
20000
Block size
price the Bitcoin (USD)

800 taux de
15000 hachage
600 Nb.transaction

10000 prix normalisé

400
volatilité
5000
200 price BTC

0 0
sept.-11

mai-12
sept.-12

mai-13
sept.-13

mai-14
sept.-14

mai-15
sept.-15

mai-16
sept.-16

mai-17
sept.-17

mai-18
sept.-18
janv.-12

janv.-13

janv.-14

janv.-15

janv.-16

janv.-17

janv.-18

janv.-19
Note: This graphic shows the evolution of the Bitcoin price, overlaid on a series of dummy variables. These
take the value of 1 when the ratio of [calculated BSDAF statistic / simulated critical value -1] exceeds zero.
The dummy variables are calculated on the tests for the price alone, Price Normalized; block size,
Blocksize_Normalized; Volume, Volume Normalized and Hash rate, Hashrate_Normalized

Indeed, Bitcoin experienced its first explosion between August 2012 and September
2012, after a steady stream of good news that resulted in a price increase of more than 93%. It
is interesting to note that the explosiveness of Bitcoin in 2013 appeared in early January until
mid-April. He also experienced an explosion in October and November in the same year.
Then, in 2017, Bitcoin experienced an explosion at the end of April. The explosiveness of
Bitcoin appeared at the end of May and lasted until the end of June, then again in August and
September. These periods coincided with the difficult price range (the gap between bid-ask)
that occurred in mid-2017. Towards the end of October, until the end of December, Bitcoin
exploded. Overall, the explosive results are consistent with those of Su et al. [2018]. Several
periods of "explosiveness" are highlighted, especially until 2017 on the Bitcoin market (Bouri
et al [2018], Corbet, Lucey, Yarovya [2017])

Finally, we calculate the fundamental value of a series of Bitcoin prices in order to

locate the bubble periods on the American Bitcoin market. By way of illustration, Graph 5
shows the price evolution of Bitcoin and its fundamental value calculated from equation (3)
over the period from 18 Dec. 2011 to Jan. 27, 2019. The defined criteria identify the price of
21
 Bitcoin on the US market characterized by a price significantly higher than their fundamental
value.
Graphic 5: The price of Bitcoin on the American market

20,000 20,000

15,000 15,000
6,000
6,000
10,000
4,000 10,000
4,000
5,000
2,000 5,000
2,000
0
0
0 0

-5,000
-2,000 -2,000

-4,000 -4,000
250 500 750 1000 1250 1000 1050 1100 1150 1200 1250 1300

Residual Actual Fitted Residual Actual Fitted

The periods for which bubbles were located were recorded in 2012, beginning and end
of 2013, 2017, and 2018.

In general, speculative bubbles are triggered on the bitcoin market, starting in October
and November and sometimes in May, and generally ending in September and December, and
a few times in February. In general, we observe from December that the Bitcoin price series is
above their fundamental value in each period of speculative bubbles. For example, in the
bitcoin market (Graphic 5 above), the biggest speculative bubble, the price is above their
fundamental value between the period of 24/09/2017 (1100) until 27/01/2019 (1346) appear
as the most critical period, from which the bubble explodes.

Based on the empirical results, BTC bubble occurrences are generally consistent with
the asset price model; once the bubble components exist, the price of the BTC increases
accordingly. Major international events can influence BTC's global markets and support the
development of a long-term bubble. To avoid potential risks, investors are looking for BTCs
to replace currencies.

However, some national components would cause bubbles that could not be passed on
to other countries and would burst quickly. Investors retain BTC because they believe that the
value of the BTC will increase while the USD should depreciate. The BTC is recognized as a

22
perfect speculative vehicle because there is no guarantee of repayment at any time
(Kristoufek, [2013], Yermack, [2014], Bouoiyour et al [2015]).

In general, we can see that a bubble is usually accompanied by a sharp increase in BTC
prices; Conversely, lower prices lead to the bursting of the bubble. In addition, we can deduce
that extreme price fluctuations are due to speculation and hedging. Thus, government
authorities should provide reasonable advice to investors so that they can avoid large
fluctuations in the financial markets.

However, the alert phase14can sometimes be short and crises15 can be anticipated. We
also note that the economic crisis in Spain and Cyprus has affected the Bitcoin market. This
highlights the vulnerability of the market to exogenous shocks.

Speculative bubbles can occur for several reasons. The top four reasons are, firstly
Priateat40 who said they no longer accept payment in bitcoins. Secondly, speculative bubbles
can arise because of the economic crises in Spain and Cyprus; in particular, the credit ratings
of both countries fell to the rank of waste securities. Thus, during the financial crisis, more
and more people seem to lose confidence in traditional currencies and turn to the BTC as an
alternative currency. The third reason to highlight is the development of blockchain
technology. The fourth bubble reason is correlated with the emergence of new financial
technology, and collapse due to attacks and hackers from several bitcoin exchange platforms.
These observations lead us to propose the analysis of speculative bubbles as a market warning
indicator.

4. Conclusion
In this research, we conducted a series of tests on the existence of bubbles in the bitcoin
market, including the tests proposed by Phillips, Shi and Yu [2015], which demonstrated its
ability to detect bubbles robust. These tests are designed to detect the stochastic explosive
behavior of a given time series, as this explosive characteristic is generally shared by all the
bubbles.
The empirical results show that there are five huge explosive bubbles in the period
2011-2018, lasting 66 to 165 days, respectively. The bursting of these bubbles also coincided
with some major events occurring on the BTC market.

14
The alert here means the periods have not yet broken out.
15
The crisis comes as soon as the bubble bursts

23
 The empirical results show that there are five huge explosive bubbles in the period
2011-2018, lasting 66 to 165 days, respectively. The bursting of these bubbles also coincided
with some major events occurring on the BTC market.

In general, BTC bubbles have been accompanied by volatile international events. This
means that, the appearance of bubbles corresponds to periods with a price increase;
conversely, and in line with the bubble model, falling prices cause bubbles to burst
(Gurkaynak, 2008).

More specifically, the onset of bubbles comes from exogenous shocks, including
foreign or domestic economic events. Severe financial crises can trigger global bubbles as
crises provoke a negative investor response to government-backed currencies; As a result,
they will choose to pursue other assets, resulting in an increase in the price of the BTC.

Our study thus confirms that investors, financial journalists and other players in the
BTC market have said this BTC was in a bubble since a relatively short existence. Our results
confirm the claim that the last bubble and the biggest bubble broke out in April 2018, which
could be explained by the attacks and hacks of several BTC trading platforms.

Forecasters' forecasts show that the BTC can exceed 20,000 USD, and even the 40,000
USD after, it can collapse to 5 USD or the 1 cent (Aksakov [2018]). In short, investors are
looking for BTC as a safe haven against potential risks or as a speculative vehicle.

In the long term, the bubbles would collapse following the intervention of the economic
authorities. Given the influence of speculative components on the BTC's price bubbles,
government authorities manage public anticipation and help members of the public recognize
the essence of virtual currency and avoid irrational investments to stabilize the financial
market. This should be a goal to guard against the fallout of foreign financial risks.

It should be emphasized that studies documenting the existence of bubbles indicate that
bubbles are caused by weak regulations or regulatory failure (Sornette 2003, and Herrera
2003, Shiller 2000, Vogel 2010) growth prospects (Shiller 2000, Pastor and Veronesi 2004,
Vogel 2010), inadequate market infrastructure hindering the efficient flow of information
(Taipalus, 2012) and over-ranking (Vogel, 2010, Kindleberger, 2000; Heaton and Lucas,
2000).
This aspect raises issues related to the use of BTC as a means of payment for illicit
transactions and money laundering (Hope, McLannahan [2017]). However, the role of

24
cryptocurrencies is so important that governments are beginning to look at ways to deal with
these illicit transactions (Seddon, Terazono [2017]).

Crypto assets also involve the risks of attack, money laundering and terrorist financing.
In other words, the anonymity of the issuing mechanisms and the transfer of crypto assets
favor a criminal use risk16. Essentially the BTC, as a source of specific risks in money
laundering and terrorist financing (Banque du France [2018]).

There are some risks of hacking electronic wallets that allow the storage of crypto
assets. In this context, the owners have no right of refuge, if their assets are stolen by hackers.
The repeated episodes on major frauds17, namely the vulnerability of the crypto-currency
ecosystem are a very important level of associated risks, in the absence of security
mechanisms.
It is desirable to regulate identity risk monitoring activities associated with active crypto
for four main reasons: the fight against money laundering and terrorist financing, which seem
to be a top priority; the protection and preservation of investors, the integrity of the market,
including in the face of cyber risks, and finally, if the growth of these activities continues, the
concerns of financial stability.
In order to guarantee excellent regulatory efficiency, he wishes to develop European
and international coordination. Given the intangible nature of crypto-currencies and the use of
Internet-related technologies facilitating cross-border services, the heterogeneity of national
regulations may prevent a complete control of induced risks (Banque du France [2018]).

16
sale on the internet of unlawful goods or services
17
coincheck pings in January 2018 for US $ 534 million, a resounding failure in 2015 of the world's first bitcoin
trading platform, MtGox

25
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