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Abstract:
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This study systematically diagnoses the bubbles and crashes in the cryptocurrency market, including Bitcoin, Bitcoin Cash, Ethereum, Ethereum classic, Litcoin, Stellar, XRP, Tether, Cardano, and Chainlink. The number of active addresses as a proxy of the number of active users is used in the generalized Metcalfe’s Law to evaluate the fundamental values of cryptocurrency market capitalization. The results show that the market capitalization of some cryptocurrencies have a statistically significant relationship with the number of active addresses, while the market capitalization of others are not associated with the number of active addresses, indicating that the generalized Metcalfe’s Law is not a universal law for evaluating the basic values of cryptocurrency market capitalization. Further, we develop a novel bubble diagnosis framework by combining the generalized Metcalfe’s Law and the log-periodic power law singularity model to detect the bubble in the cryptocurrency market. This study creates a paradigm for future studies in bubble and crash detection in not only the cryptocurrency market, but also other financial markets.
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