A Look at Past Bitcoin Bubbles -- What Price to Expect Next?

in bitcoin •  3 months ago

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The goal of this post is very simple: to get an idea as to what kind of price appreciation we can expect if/ when bitcoin moves on to make new highs, based on the, what I consider to be very "close to objective", observation that bitcoin moves in relatively quick boom and bust cycles, or "bubbles", if you prefer.

I'm going to observe bitcoin's past bubbles in isolation, looking at how much each appreciated from the low (of the last bubble cycle) and how much they corrected after establishing a new all-time high (ATH). We can then use that data to establish a range and average of what we may consider a "probable" price target for a future bubble, giving us a reasonable estimate of the new ATH.

Shall we proceed?

Not So Fast... Let Us Clearly Define "BUBBLE"

The below image is the textbook diagram of a economic (financial/ asset) bubble. It lays out the psychological stages that are involved in overshooting an asset's "true value". It's essentially a market over-valuing one asset relative to others, due to becoming irrationally manic, usually by deluding oneself with ideas of endless wealth (from the investment) or future prospects (of the asset invested into).

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As I see it, the stages don't necessarily have to coincide with the background labels (smart money, institutional investors, public). It's more to do with awareness cycles among the lot who are open to the idea of investing into the market in any given range of time, and the effects of these awareness cycles become very clear in retrospect when the moments of exponential price appreciation followed by deep correction etch their paths on the price history chart.

We get many looks at these awareness cycles through the current price history of bitcoin and we're going to look at them in chronological order, starting........right................. n.............not yet.....but............. NOW!

Bubble #1: ATH on April 10, 2013

Three-Day Candlestick of Bitstamp:

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Low (before bubble) - 10/20/11 - $2.22
ATH (when bubble completed) - 4/10/13 - $259.34
New Low (after bubble correction) - 4/12/13 - $45.00
Date of New ATH (after the bubble correction) - 11/6/13

  • Time to complete the bubble (from day 1 of public trading): 601 days
  • Time to form a new low after the bubble ATH: 2 days
  • Time to make a new ATH after the bubble correction: 210 days
  • Price appreciation from prior low to bubble ATH: 11,682 %
  • Price correction from bubble ATH to new low: 82.6 %

Bubble # 2: ATH on November 30, 2013

Three-Day Candlestick of Bitstamp:

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Low (before bubble) - 4/12/13 - $45.00
ATH (when bubble completed) - 11/30/13 - $1,163.00
New Low (after bubble correction) - 1/14/15 - $152.40
Date of New ATH (after the bubble correction) - 2/23/17

  • Time to complete the bubble (from the ATH of the last bubble): 234 days
  • Time to form a new low after the bubble ATH: 410 days
  • Time to make a new ATH after the bubble correction: 1,181 days
  • Price appreciation from the low of the last bubble to current bubble ATH: 2,584 %
  • Price correction from bubble ATH to new low: 86.9%

Bubble # 3: ATH on December 17, 2017

Three-Day Candlestick of Bitstamp:

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Low (before bubble) - 1/14/15 - $152.40
ATH (when bubble completed) - 12/17/17 - $19,666.00
New Low (after bubble correction) - ??? - $???
Date of New ATH (after the bubble correction) - ???

  • Time to complete the bubble (from the ATH of the last bubble): 1,478 days
  • Time to form a new low after the bubble ATH: ??? days
  • Time to make a new ATH after the bubble correction: ??? days
  • Price appreciation from the low of the last bubble to current bubble ATH: 12,904 %
  • Price correction from bubble ATH to new low: ??? %

All Tallied

We have a percent gain range of between 2,584 and 12,904 % from the new low (of the last bubble) to the new ATH of the next bubble (based on the sample of three). The mean average percent gain comes in at 9,057 % with a sample standard deviation of 5,639 %.

Assuming that the current bubble's new low is in (on 6/29/18 at $5,774.72), and note that I consider that a rather large, unsupported assumption, but, nonetheless, if this should happen to be the lowest low before BTC goes on to form another bubble...

...then, based on the three important data points that we gathered above, it wouldn't be outside reason to have the new ATH come in somewhere between $149,219.00 (calculated using the lowest percent return of the three bubbles) and $745,170 (using the highest appreciation percentage of the bubbles).

We arrive at $523,016 when using the mean bubble price appreciation (from the low of the last bubble), with a sample standard deviation range of $197,380 to $848,652 (1 SD = +/- $325,636).

Conclusion...of Sorts....

Of course, three is a laughably small sample size, so the mean and standard deviation are rendered nearly meaningless from a statistical significance perspective, but that's not to say that we should discard the above data as completely not useful when trying to project where the price of bitcoin might go.

If nothing else, it's interesting to take a look back at the past to get an idea about how crazy of a price move that BTC is capable of making. If BTC makes a similar move to what it has in the past, we could easily be north of half a million dollars per and $1 million per is not out of the question (based on the data accumulated within this post, alone).

Now, whether it can really reach those types of valuations based on the fundamentals and the amount of capital that it would require to reach those levels, presumably multiples of trillions of dollars in cumulative investments, that's a topic for another discussion.

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Actually, note it might not necessarily take a lot of capital to push the price up again significantly.

The mental trick that market price analysis does with us is to make us assume that all bitcoins need to be bought from a given (limited) pool of capital - if someone kickstarts a new bull run, once the new mania catches then the price can go up by a "virtuous circle" (people buy because they think it will go up which makes the price go up which confirms what people believed which makes more people become convinced that it will go up and so on ...).

In practice, that means that the price movement itself "feeds back" and (indirectly, through its action on human psychology) leads to an increase in the capital pool dedicated to ... maintaining the price movement. That is the nature of bubbles ...

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Good points, @sorin.cristescu.

A market bubble is really just a synonymous term for "buying craze", after all. Excitement tends to attract more excitement (from other people), whether we consider fans in a stand at some sporting arena or children singing "happy birthday" around a cake or participants of the (stock) market or ________ (name any "event" where people come together to share in some type of activity). Like you said, on the market side this translates into a self-feeding loop of positive expectations that attracts the next buying wave(s) and quickly snowballs into the parabolic moves that are the hallmark of bubbles.

I think a price aroun 15k or 20K could be great to close this year but as we know maybe we can see a new high :). Regards

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I agree and I'd LOVE to see a new ATH before the close of the year.

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this year end will be interesting to see as many people has high hopes it the prices not deliver that much expectations in return then crypto will be going sideways for a long time in bearish trend

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