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Last Updated: February 25, 2016
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· priestc

A new bitcoin bubble narrative

If you follow bitcoin, you've probable seen this image many times before:

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Bitcoin has 'bubbled' many times since it started in 2009. Each time it bubbles, the graph does end up looking like this graph.

The one problem I have with this graph is that it implies that the end result of a bubble is "return to the mean". In Bitcoins case, it never returns to it's mean
. There is no mean. Or rather bitcoin's mean is constantly increasing.

Therefore I think we need to make a new bubble narrative chart, one for assets that are expected to bubble over and over again.

As far as I know, bitcoin is the only asset that has ever bubbled over and over again in the way that it is currently doing. Because of this, we only have the BTC chart to look at in order to figure out the patterns.

The 30 bubble recovery

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The very first bitcoin bubble occurred in late 2010 when the price hit 30$, then slowly declined all the way down to $3. At the time people were posting that first bubble graphic inked in this blog all over the internet. No one at the time had any idea another bubble was on the way.

Look at the price chart above. It is scaled to show the peak of the 30 bubble on the right x-axis, and the next time the price would see $30 again on the left side of the x-axis. In between these two events we see the shape the price makes as it maneuvers from the end of one bubble to the beginning of the next.

The 250 bubble recovery

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In April 2013, it happened again. The price shot up to $250, then collapsed down to about $70 before rebounding yet again to bubble for a third time up to $1200.

This price chart is scaled the same way as the 30 bubble price chart. On the far left is the tip of the 250 price bubble on Dec 18, 2013 and the far right is the next time the price would see $250 again (early November 2013 as the price bubbles up towards $1200)

The 1200 bubble recovery

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As of the time of this blog being written, the 1200 bubble has not yet fully recovered. If you were to place the bitcoin market as of November 3, 2014 on the "classic bubble chart" we'd be somewhere between "despair" and the next "take off". Since that chart is under the assumption that bubbles only happen once, the current state of bitcoin doesn't fit too well onto that graph.

Common features

If you look at the graphs of each bubble recovery overlaid onto each other, you'll notice the graphs take similar shape:

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The 30 recovery and 250 recovery have a very similar path towards the end of the cycle. The 1200 bubble seems to still be very early stage, suggesting the next bubble isn't going to happen for quite a few more months.

I have identified three distinct phases of the bubble cycle: "initial crash", "bottom bounce", "tumbleweeds", calm before the storm", and then "to the moon". Since the previous two bubble recoveries followed this pattern, I predict the next bubble will follow a similar pattern.

Predicting the next bubble after $1200

Its really really really hard to predict markets (or the future in general). Nobody knows when the next bubble will happen, or what value it will bubble to.

If my theory is correct about the phases of the bubble cycle, then it may be possible to predict when the next "to the moon" phase will happen by comparing the "scale of events".

Here is the same "$30 bubble recovery" chart from before, but with points annotated:

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The following line segments make up each phase:

  • 30A - 30B1: initial crash
  • 30B1 - 30B2: bottom bounce
  • 30B2 - 30C: tumbleweeds/calm before the storm
  • 30C - 30D: to the moon

It is important to note the amount of time it took to get from 30A to 30D (about 20 months). Also note that the bottom point was touched twice (once in the middle of October 2011 and again about a month later in November 2011). After it found its bottom it pretty much stayed there for the entirety of 2012 and them some.

The 250 chart has the same "topography" but obviously a different shape:

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Note the 250 recovery has a much less pronounced boundary between "tumbleweeds" and "calm before the storm". The 30 recovery was much more "difficult" than the 250 recovery. The amount of time between 250A and 250D is only about 6.5 months. The 250 recovery was much quicker than the 30 recovery.

Also note the way the price hits its bottom. During the 30 recovery, the price slowly collapses down to its B1 then pretty much stayed there. In contrast the 250 bubble only "tisked" its bottom point before climbing right up. Its as if the market only went through the motions of a despair phase, not a real despair phase like in the 30 bubble recovery.

Where does this leave us for the 1200 bubble? Its still very hard to say if we've reached the B1 or B2 of the 1200 cycle yet, but the charts as of today looks a lot like the 30B1/30B2 event:

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If indeed we are in the midst of the 1200B2 event, then I predict the entirety of 2015 will be a slog in terms of price, similar to 2012. I don't see the price going up much, but I don't see it going down any further either. I have on that graph the 1200C event happening on November 2015, but honestly i think it will probably happen much later, maybe November 2016 or even 2017. It makes sense to me that since the 250 bubble had such a mild despair phase, that the 1200 despair phase would be extra long.

Although it is very hard to predict since we still seem to be in the initial crash phase of the $1200 recovery. Once it becomes apparent we are in a "tumbleweeds" phase, it will be easier to predict when the next bubble will happen. At this phase it is still too early to tell.

2 Responses
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17473

Nice analysis. Is there any correlation between how high the new high was and the length of recovery period afterwards?

over 1 year ago ·
17482

pennyfx, the drop between 30A and 30B1/30B2 was from 30 to 2.1. Thats a drop of 1428%, the drop between 250A and 250B1/250B2 was much less drastic (from 250 to 65 for a decrease of 385%).

If the 1200 bubble ends up matching the 30 bubble in magnitude, then we can assume the 1200 bubble will bottom out at 84. If it was going to be more like the 250 crash, it would have seen it's bottom at 312. Which is kinda where we are now...

over 1 year ago ·