The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy

http://www.sg.ethz.ch/media/publication_files/J._R._Soc._Interface-2014-Garcia-.pdf

What is the role of social interactions in the creation of price bubbles? Answering
this question requires obtaining collective behavioural traces generated by the
activity of a large number of actors. Digital currencies offer a unique possibility
tomeasure socio-economic signals fromsuch digital traces. Here,we focus on Bitcoin,
the most popular cryptocurrency. Bitcoin has experienced periods of rapid
increase in exchange rates (price) followed by sharp decline;we hypothesize that
these fluctuations are largely driven by the interplay between different social
phenomena. We thus quantify four socio-economic signals about Bitcoin from
large datasets: price on online exchanges, volume of word-of-mouth communication
in online social media, volume of information search and user base
growth. By using vector autoregression, we identify two positive feedback
loops that lead to price bubbles in the absence of exogenous stimuli: one
driven bywordof mouth, and the other by newBitcoin adopters.We also observe
that spikes in information search, presumably linked to external events, precede
drastic price declines. Understanding the interplay between the socio-economic
signals we measured can lead to applications beyond cryptocurrencies to other
phenomena that leave digital footprints, such as online social network usage.