In his 2012 paper “Exogenous and endogenous market crashes as phase transitions in complex financial systems“, J.M. Fry (Management School, University of Sheffield), has developed a unifying framework for a set of seemingly disparate models for exogenous and endogenous shocks in complex financial systems. It turns out that markets operate by balancing intrinsic levels of risk and return. Fry states that this remains true even in the midst of transitory exogenous and endogenous shocks. According to Fry, changes in market regime (bearish to bullish and bullish to bearish) can be explicitly shown to represent a phase transition from random to deterministic behavior in prices. The resulting models refine the empirical analysis in a number of previous papers.
Already in 2014, Fry explains in an article in Significance the way crypto currencies behave in the financial context a bubble:
“Bubbles often occur at a time of economic expansion; typically either at a time of rapid technological development (e.g. internet bubble, railroad stocks) or an influx of new investors (e.g. subprime mortgage bubble). Genuinely profitable opportunities exist but the true extent of the gains available is unknown until this limit is finally reached. As technology continues develop apace, and people try to get rich quick, future stock market bubbles will always be possible.“
Crypto Bubble and its Consequences
Fry’s indicators can be seen easily in today’s markets. Speculators of modest means have made a lot of money when the price climbed by more than 1,500pc since January 2017, hitting $18,000 in December 2017. Bitcoin enthousiasts are attracted by the potential of making an enormous return in a short period of time. Even professional financial parties, such as banks, appear to have abandoned gold as the traditional solid asset. The Google search term “buy Bitcoin” currently produces much more results than the equivalent term “buy gold“. This seems to indicate that both consumers and professionals are willing to behave much more speculatively than in previous bubbles, making the consequences much more unpredictable then before. When numerous consumers and professionals start facing the consequences of heavy losses, the consequences for the economy as a whole can be devastating, especially in today’s ultrafast and international technoconomy. It is my advise to be prepared for an economic crises that the world has never seen before, affecting the public’s faith in traditional currencies, financial markets and governments.
- Fry, J., Are we in a bubble? Lessons in dissecting the stock market in Significance 15 May 2014.
- Fry, J. Eur. Phys. J. B (2012) 85: 405. https://doi.org/10.1140/epjb/e2012-30234-8
R.A.U. Juchter van Bergen Quast