Authors: Larisa Yarovaya and Brian Lucey*

In the last year, the price of Bitcoin has increased from less than US$800 to more than US$12,000. This huge spike in value has many asking if it is a bubble or if the high price today is here to stay.

Finance defines a bubble as a situation where the price of an asset diverges systematically from its fundamentals. Investment mogul Jack Bogle says there is nothing to support Bitcoin, and the head of JP MorganChase, Jamie Dimon has called it a fraud &ldquo;worse than tulip bulbs&rdquo;.

Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity. So there are reasons to hold it. But our research does show that it is experiencing a bubble right now.

Together with Shaen Corbet at Dublin City University, we took as the fundamentals of Bitcoin elements of the technology that underpins it (and other cryptocurrencies). We looked at measures, which represent the key theoretical and computational components of how cyrptocurrencies are priced.

New Bitcoin is created by a process of mining units called blocks. Bitcoin is built on blockchain technology &ndash; a digital ledger of transactions &ndash; which enables the currency to be traded independently from any central banking system, without risk of fake or duplicate Bitcoins being used. Instead of having a bank verify pending transactions (a &ldquo;block&rdquo;), miners check them and, if approved, the block is cryptographically added to the ever-expanding ledger.

So the first measure we examined relates to mining difficulty. It calculates how difficult it is to find a new block relative to the past. As per the Bitcoin Protocol, the number of Bitcoin is capped at 21m (there are currently 16.7m in circulation). This means that as more people mine for Bitcoin and more blocks are created, each block is, all things being equal, worth less than the previous block.

The second measure we looked at relates to the &ldquo;hash rate&rdquo;. This is the speed at which a computer operates when mining. To successfully mine Bitcoin, you must come up with a 64-digit hexadecimal number (called a &ldquo;hash&rdquo;), which is less than or equal to the target hash. The faster you can do this, the better chance you have of finding the next block and receiving payment. 
The third measurement was &ldquo;block size&rdquo;. This relates to how large the chain is at any given time, with larger chains taking longer to mine than shorter ones.

And lastly we looked at the volume of transactions conducted. Any asset, in particular any currency, which is more widely used will be more valuable than one which is used less frequently.

In our study, we examined data from Bitcoin&rsquo;s early days &ndash; from July 2010 to November 2017. The price of one Bitcoin did not rise above US$1 until April 16, 2011, then to US$10 on June 3, 2011 and US$100 on April 2, 2013. Since then the price rise has clearly been exceptional.

<iframe allowfullscreen="allowfullscreen" allowtransparency="true" frameborder="0" height="450" mozallowfullscreen="mozallowfullscreen" msallowfullscreen="msallowfullscreen" oallowfullscreen="oallowfullscreen" scrolling="no" src="https://datawrapper.dwcdn.net/mygLM/1/" webkitallowfullscreen="webkitallowfullscreen" width="100%"></iframe>

<figure class="align-center zoomable">
We then applied an accepted method that is used to detect and date stamp bubbles after they burst. In essence, this involves identifying the existence of an explosive component in a series. As the series, here the price of bitcoin, &ldquo;explodes&rdquo;, it runs the risk, like any explosion, of flying apart.

A possibly counter-intuitive result of this approach is that if a fundamental driver and the price of an asset both show an explosive component, we might not conclude a bubble is present. A bubble is when something deviates from its fundamental value. If the fundamental value is itself growing explosively then the price would also.

Think of dividends on a stock. If, somehow, these were to grow at an explosive rate we might expect to see the price do the same. While unsustainable, this is not technically a bubble. To overcome this, we then date stamp a bubble as being present when the price shows an explosive component and the underlying fundamentals do not.

Here are the results of the analysis:

<a href="https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img alt="" src="https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" /></a>

<figcaption>The Bitcoin Bubbles.Authors own calculations</figcaption>
</figure>

&nbsp;

The orange lines denote when the price is showing explosive behaviour. We also see a period where the hash rate was growing explosively &ndash; the blue columns in late 2013 and early 2014. This is also an indication of a price bubble, which went on to burst.

So there are clear points where bubbles are visible &ndash; including now. The price of Bitcoin at present shows explosive behaviour in the absence of anything similar in its fundamentals. We see the price moving upwards in a manner that is not related to the technical underpinnings. It is a clear bubble.

A weakness of these tests and indeed all bubble identification tests is that they take place after the bubble has burst. Even this test, which can be redone as swiftly as new data arrives, is such. Bubbles by their nature grow in a compound manner &ndash; so even a day or two delay in addressing the situation can make a bubble significantly worse.

What is not yet available is an accurate advanced warning bubble indicator. In its absence, this approach may be the best. Unfortunately, we cannot use this approach to determine the extent of the bubble. There is no well-accepted model that suggests a &ldquo;fair&rdquo; value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now.

This article was originally published on <a href="http://theconversation.com" rel="nofollow" target="blank">The Conversation</a>. Read the <a href="https://theconversation.com/the-bitcoin-bubble-how-we-know-it-will-burst-88511" rel="nofollow" target="blank">original article</a>.

*Brian Lucey:&nbsp;Professor of International Finance and Commodities, Trinity College Dublin

(Disclaimer: Both authors write here in a personal capacity).

An analysis of Bitcoin's fundamentals shows how much of a bubble its price has inflated to

Authors: Larisa Yarovaya and Brian Lucey* In the last year, the price of Bitcoin has increased from less than US$800 to more than US$12,000. This huge spike in value has many asking if it is a bubble or if the high price today is here to stay. Finance defines a bubble as a situation where the price of an asset diverges systematically from its fundamentals. Investment mogul Jack Bogle says there is nothing to support Bitcoin, and the head of JP MorganChase, Jamie Dimon has called it a fraud “worse than tulip bulbs”. Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity. So there are reasons to hold it. But our research does show that it is experiencing a bubble right now. Together with Shaen Corbet at Dublin City University, we took as the fundamentals of Bitcoin elements of the technology that underpins it (and other cryptocurrencies). We looked at measures, which represent the key theoretical and computational components of how cyrptocurrencies are priced. New Bitcoin is created by a process of mining units called blocks. Bitcoin is built on blockchain technology – a digital ledger of transactions – which enables the currency to be traded independently from any central banking system, without risk of fake or duplicate Bitcoins being used. Instead of having a bank verify pending transactions (a “block”), miners check them and, if approved, the block is cryptographically added to the ever-expanding ledger. So the first measure we examined relates to mining difficulty. It calculates how difficult it is to find a new block relative to the past. As per the Bitcoin Protocol, the number of Bitcoin is capped at 21m (there are currently 16.7m in circulation). This means that as more people mine for Bitcoin and more blocks are created, each block is, all things being equal, worth less than the previous block. The second measure we looked at relates to the “hash rate”. This is the speed at which a computer operates when mining. To successfully mine Bitcoin, you must come up with a 64-digit hexadecimal number (called a “hash”), which is less than or equal to the target hash. The faster you can do this, the better chance you have of finding the next block and receiving payment. The third measurement was “block size”. This relates to how large the chain is at any given time, with larger chains taking longer to mine than shorter ones. And lastly we looked at the volume of transactions conducted. Any asset, in particular any currency, which is more widely used will be more valuable than one which is used less frequently. In our study, we examined data from Bitcoin’s early days – from July 2010 to November 2017. The price of one Bitcoin did not rise above US$1 until April 16, 2011, then to US$10 on June 3, 2011 and US$100 on April 2, 2013. Since then the price rise has clearly been exceptional. We then applied an accepted method that is used to detect and date stamp bubbles after they burst. In essence, this involves identifying the existence of an explosive component in a series. As the series, here the price of bitcoin, “explodes”, it runs the risk, like any explosion, of flying apart. A possibly counter-intuitive result of this approach is that if a fundamental driver and the price of an asset both show an explosive component, we might not conclude a bubble is present. A bubble is when something deviates from its fundamental value. If the fundamental value is itself growing explosively then the price would also. Think of dividends on a stock. If, somehow, these were to grow at an explosive rate we might expect to see the price do the same. While unsustainable, this is not technically a bubble. To overcome this, we then date stamp a bubble as being present when the price shows an explosive component and the underlying fundamentals do not. Here are the results of the analysis: The Bitcoin Bubbles.Authors own calculations The orange lines denote when the price is showing explosive behaviour. We also see a period where the hash rate was growing explosively – the blue columns in late 2013 and early 2014. This is also an indication of a price bubble, which went on to burst. So there are clear points where bubbles are visible – including now. The price of Bitcoin at present shows explosive behaviour in the absence of anything similar in its fundamentals. We see the price moving upwards in a manner that is not related to the technical underpinnings. It is a clear bubble. A weakness of these tests and indeed all bubble identification tests is that they take place after the bubble has burst. Even this test, which can be redone as swiftly as new data arrives, is such. Bubbles by their nature grow in a compound manner – so even a day or two delay in addressing the situation can make a bubble significantly worse. What is not yet available is an accurate advanced warning bubble indicator. In its absence, this approach may be the best. Unfortunately, we cannot use this approach to determine the extent of the bubble. There is no well-accepted model that suggests a “fair” value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now. This article was originally published on The Conversation. Read the original article. *Brian Lucey: Professor of International Finance and Commodities, Trinity College Dublin (Disclaimer: Both authors write here in a personal capacity).

Opinion: The Bitcoin bubble ? how we know it will burst

Islamic finance is enjoying a surge in popularity, with 14 per cent annual growth in recent years. And the interest in sharia-compliant stocks and bonds is growing across the non-Muslim as well as Muslim world.

My recent research shows that there is a good reason for this growth. In fact, Islamic markets were not rocked by the 2007-08 financial as much as conventional markets and can be considered a new safe haven for investors.

The popularity of Islamic financial instruments among Muslims is not surprising. Islamic law prohibits any forms of interest (riba) or gambling (qimar). Transactions that lack transparency (gharar) are also banned. In finance, this means that the vast majority of assets and popular trading strategies (such as short-selling and speculation) are prohibited according to Islam.

To circumvent this problem Islamic banks issue sharia-compliant bonds known as sukuk. Conventional bonds involve a contractual obligation to pay bondholders interest and principle on a certain date. When sukuk bonds are sold to investors the money is used to invest in an asset, of which the bondholders have partial ownership. Payments to sukuk bondholders them comes from whatever after-tax profit is made on the asset. When they reach maturity, the issuer is contractually obliged to buy the bond back at the value it was bought for.

There are also sharia-compliant stocks, which must comply with risk-averse criteria such as a low debt to income ratio. Plus, the company should have limited engagement with activities that are considered sinful in Islam, such as alcohol and tobacco. So Islamic stocks are attractive for Muslim investors, but also for non-Muslim investors since these assets can be seen as more ethical.

Wider benefits

There are two popular beliefs that attract non-Muslim investors to choose sharia-compliant assets. First, Islamic financial instruments can offer higher profits than non-Islamic assets. For example, for borrowers, high demand for ethical assets increases the marketability of sukuk in comparison to conventional bonds.

Second is the idea that Islamic financial markets are decoupled from conventional markets. There is a belief that the markets move in opposite directions during crisis periods so when conventional markets decline, Islamic ones grow. So, Islamic markets offer an important way for investors to diversify their portfolios and protect themselves against downturns in conventional markets.

As a result, Islamic finance is often placed in the category of alternative finance, with good potential for risk reduction. I and colleagues in the US, Saudi Arabia and Tunisia decided to put this idea to the test. After all, Islamic bonds are, generally speaking, not much different from traditional bonds in terms of their structure. And Islamic stocks are often affected by the same global risk factors as conventional stock markets such as the crude oil price and the volatility index.

A safe haven

There have been a number of financial crises to rock stock markets over the years. The last two decades have seen the 1997 Asian financial crisis, 1998 Argentinian crisis, 2007-08 US and UK financial crisis to name a few. This causes significant volatility across markets, causing substantial losses for investors. They are therefore constantly searching for markets that are less influenced by crisis shocks.

In a recent study, we compared Islamic indexes with their conventional counterparts during crisis periods in last two decades, across five regions: the US, UK, Canada, Japan, eurozone and the Asia-Pacific. We found that during turbulent periods the Islamic indexes decoupled from non-Islamic markets.

There was a limited spillover of the crisis shock from conventional indexes to Islamic ones and so they did provide an opportunity for risk reduction. For example, with Canada&rsquo;s Islamic and conventional indexes, during tranquil periods the volatility spillover from conventional to Islamic index reaches close to 40 per cent. But after the 9/11 terrorist attacks, the Canadian Islamic index receive just 10 per cent of volatility. This reflects the fact that volatility levels are quite similar during tranquil periods, but there is a separation when turbulence hits conventional markets.

These results are also true for the global financial crisis and the eurozone debt crisis. The behaviour of the net volatility spillovers between Islamic and conventional markets shows that the Islamic indexes move against conventional indexes during the turbulent periods.

Shariah-compliant assets will not save investors entirely from loses &ndash; it does not act as a cushion against all financial shocks that affect the conventional markets. And, in periods of economic stability, investors would not benefit much from investing in Islamic markets, as the correlation between Islamic and conventional markets is high during calm periods. But, nonetheless, Islamic markets have been less heated by global financial shocks and so can claim the status of a new safe haven, particularly from a non-Muslim investor&rsquo;s perspective.

Photo Credit: Shutterstock

This article was originally published on <a href="http://theconversation.com" rel="nofollow" target="blank">The Conversation</a>. Read the <a href="https://theconversation.com/how-islamic-financial-markets-are-a-safe-haven-in-conventional-market-crises-84243" rel="nofollow" target="blank">original article</a>.

Islamic markets were not rocked by the 2007-08 financial as much as conventional markets

Islamic finance is enjoying a surge in popularity, with 14 per cent annual growth in recent years. And the interest in sharia-compliant stocks and bonds is growing across the non-Muslim as well as Muslim world. My recent research shows that there is a good reason for this growth. In fact, Islamic markets were not rocked by the 2007-08 financial as much as conventional markets and can be considered a new safe haven for investors. The popularity of Islamic financial instruments among Muslims is not surprising. Islamic law prohibits any forms of interest (riba) or gambling (qimar). Transactions that lack transparency (gharar) are also banned. In finance, this means that the vast majority of assets and popular trading strategies (such as short-selling and speculation) are prohibited according to Islam. To circumvent this problem Islamic banks issue sharia-compliant bonds known as sukuk. Conventional bonds involve a contractual obligation to pay bondholders interest and principle on a certain date. When sukuk bonds are sold to investors the money is used to invest in an asset, of which the bondholders have partial ownership. Payments to sukuk bondholders them comes from whatever after-tax profit is made on the asset. When they reach maturity, the issuer is contractually obliged to buy the bond back at the value it was bought for. There are also sharia-compliant stocks, which must comply with risk-averse criteria such as a low debt to income ratio. Plus, the company should have limited engagement with activities that are considered sinful in Islam, such as alcohol and tobacco. So Islamic stocks are attractive for Muslim investors, but also for non-Muslim investors since these assets can be seen as more ethical. Wider benefits There are two popular beliefs that attract non-Muslim investors to choose sharia-compliant assets. First, Islamic financial instruments can offer higher profits than non-Islamic assets. For example, for borrowers, high demand for ethical assets increases the marketability of sukuk in comparison to conventional bonds. Second is the idea that Islamic financial markets are decoupled from conventional markets. There is a belief that the markets move in opposite directions during crisis periods so when conventional markets decline, Islamic ones grow. So, Islamic markets offer an important way for investors to diversify their portfolios and protect themselves against downturns in conventional markets. As a result, Islamic finance is often placed in the category of alternative finance, with good potential for risk reduction. I and colleagues in the US, Saudi Arabia and Tunisia decided to put this idea to the test. After all, Islamic bonds are, generally speaking, not much different from traditional bonds in terms of their structure. And Islamic stocks are often affected by the same global risk factors as conventional stock markets such as the crude oil price and the volatility index. A safe haven There have been a number of financial crises to rock stock markets over the years. The last two decades have seen the 1997 Asian financial crisis, 1998 Argentinian crisis, 2007-08 US and UK financial crisis to name a few. This causes significant volatility across markets, causing substantial losses for investors. They are therefore constantly searching for markets that are less influenced by crisis shocks. In a recent study, we compared Islamic indexes with their conventional counterparts during crisis periods in last two decades, across five regions: the US, UK, Canada, Japan, eurozone and the Asia-Pacific. We found that during turbulent periods the Islamic indexes decoupled from non-Islamic markets. There was a limited spillover of the crisis shock from conventional indexes to Islamic ones and so they did provide an opportunity for risk reduction. For example, with Canada’s Islamic and conventional indexes, during tranquil periods the volatility spillover from conventional to Islamic index reaches close to 40 per cent. But after the 9/11 terrorist attacks, the Canadian Islamic index receive just 10 per cent of volatility. This reflects the fact that volatility levels are quite similar during tranquil periods, but there is a separation when turbulence hits conventional markets. These results are also true for the global financial crisis and the eurozone debt crisis. The behaviour of the net volatility spillovers between Islamic and conventional markets shows that the Islamic indexes move against conventional indexes during the turbulent periods. Shariah-compliant assets will not save investors entirely from loses – it does not act as a cushion against all financial shocks that affect the conventional markets. And, in periods of economic stability, investors would not benefit much from investing in Islamic markets, as the correlation between Islamic and conventional markets is high during calm periods. But, nonetheless, Islamic markets have been less heated by global financial shocks and so can claim the status of a new safe haven, particularly from a non-Muslim investor’s perspective. Photo Credit: Shutterstock This article was originally published on The Conversation. Read the original article.

Islamic financial markets are safe haven during market crises

Author

Zee News Rajasthan

Editor

Larisa Yarovaya

Home

Live Tv

Latest

World

India

Business

Entertainment

Sports

Opinions

Videos

Photos

Gravitas

Lifestyle

Science

Tech

Rajasthan News in Hindi: In-depth coverage of Rajasthan Crime, Political News, Education, Rajasthan Weather Update and Latest Rajasthan News on Zee News Rajasthan.