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Evidence of a bursting bitcoin bubble is piling up

US News & World Report -  Money logo US News & World Report - Money 2/10/2018 Wayne Duggan

Video by CNBC

The 40 percent sell-off in bitcoin and other cryptocurrencies to start the year has once again sparked concerns among investors that a bubble in cryptocurrency prices may be bursting. Unfortunately for investors, Goldman Sachs analysts now say they see plenty of evidence that the cryptocurrency market is experiencing a textbook financial market bubble.

In a new report, Goldman co-chief market economist Charlie Himmelberg says recent behavior in the cryptocurrency market fits Robert Shiller's definition of a bubble. In his best-selling book "Irrational Exuberence," Shiller says there are several key elements to a bubble, including news of price increases stoking investor enthusiasm and the expansion of an investor class due to envy of the success of others and fear of missing out on the action.

Read: What's the Best Bitcoin Wallet for 2018?

Shiller described this phenomenon as a "psychological contagion" that occurs during the peak of a bubble. Shiller also said bubble buying tends to happen even during a climate in which the buyers are skeptical of the fundamental value of the very assets they are buying.

"If one is looking for recent examples of price action and investor behavior that fit this profile, it is hard to imagine a better match than bitcoin and the broader universe of 'altcoins,'" Himmelberg says. He also says there are clear signs of the psychological contagion phenomenon that Shiller described.

"In addition to the exponential rise of prices and trading volumes, telltale signs of the social contagion were visible in last fall's sharp increases in Google searches and Twitter mentions," Himmelberg says. Goldman found that searches for cryptocurrency-related keywords increased by roughly 400 percent from July 2017 to December 2017 on both Twitter and Google.

Goldman's head of Global Investment Research Steve Strongin says the fact that bitcoin's price action isn't tied to any change in present or future value creation is another red flag signaling a bubble.

"At least at the moment, cryptocurrencies are not tied to the creation of economic value in the way that equities, for example, are tied to earnings growth over time," Strongin says. "Rather, the way cryptocurrencies seem to be valued today is based on what people might pay for them tomorrow, which is almost the definition of a bubble."

While Strongin says the underlying blockchain technology that powers the current generation of cryptocurrencies could have extremely valuable applications, he says today's cryptocurrencies are unlikely to survive in the long-term.


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