By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — The odds are overwhelming — above 80% — that bitcoin will crash in coming months.
I base this bold prediction on a study, “ Bubbles for Fama ,” that appeared earlier this year in the Journal of Financial Economics. Its authors are Robin Greenwood, a finance and banking professor at Harvard Business School and chair of its Behavioral Finance and Financial Stability project; Andrei Shleifer, an economics professor at Harvard University; and Yang You, a Ph.D. candidate at that institution.
This prediction has nothing to do with the particulars of bitcoin /zigman2/quotes/31322028/realtime BTCUSD -8.25% , I hasten to add. It might be, as this cryptocurrency’s true believers insist, that it will eventually dominate the monetary system, replacing gold as well as paper currencies as both a means of exchange and a store of value. But even if that turns out to be true, bitcoin would still be vulnerable to a crash. That’s because the high probability of its crashing derives solely from the rapid pace of its price rise, which in recent days has become parabolic.
The Harvard researchers found that when a runup exceeds certain thresholds, the odds grow markedly of a crash, which the researchers define as a 40% drop over a two-year period. That probability becomes 50% whenever a security’s prior runup is 100% or more over a two-year period. When the price increase becomes at least 150%, the crash probability rises to 80%. (See accompanying chart.)
Bitcoin’s recent price action more than qualifies. It has risen more than 440% over the past two years. It is up more than 270% just since the beginning of this year. The S&P 500 /zigman2/quotes/210599714/realtime SPX -3.37% over the past two years is up “only” 20%.
To be sure, you could argue that the Harvard study doesn’t apply to bitcoin, since the researchers focused on the stock market rather than cryptocurrencies. But I’m not so sure. The researchers reached their conclusion after studying nearly a century of data in both the U.S. and foreign stock markets. Their conclusions were broadly similar regardless of the time period or the country.
Though the researchers don’t speculate as to why their conclusions have broad applicability, one suspects that it derives from some basic traits of human psychology — traits that were memorialized centuries ago in the Greek myth of Icarus. Icarus, you will recall, soared too high with wings of wax — wings that melted when he flew too close to the sun, leading to his death.
It’s also worth mentioning that the researchers were unable to find any fundamental factors that increased or decreased the odds of a crash. That’s relevant to bitcoin, since many of its devotees believe that it is unique and that historical precedents don’t apply. Those devotees would do well to remember that every prior bubble was also accompanied by similar claims of historical uniqueness.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.