Bitcoin – Is it a Bubble? Evidence from Unit Root Tests

Bitcoin is a decentralised cryptographic virtual currency scheme based on a peer-to-peer network that has attracted substantial number of users in recent years. In this paper, we investigate reasons behind its success and explosive behaviour in its exchange rates in 2013-14. We debate whether bitcoin is a currency or commodity. By employing Perron (1997) unit root tests, we investigate whether shocks in Bitcoin-USD exchange rate have a permanent effect or a transitory effect and try to locate the date of structural break. We attempt to find an evidence for existence of speculative bubble in bitcoin exchange markets. This paper introduces sequential unit root tests into analysis of bubble in Bitcoin exchange rates which were recently developed by Phillips et al. (2011a, b). We find strong evidence of explosive behaviour in bitcoin exchange rates