There’s a greater-than-80% chance that bitcoin will soon crash.

To be sure, mine is not the first column to suggest that a bitcoin BTCUSD, -4.11%  crash is imminent, especially as bitcoin’s price tops $10,000. But you may not realize just how high the probability of a crash has become.

The reason of a crash’s probability is a recent study of what has happened on prior occasions when an asset’s price has skyrocketed. Bitcoin’s extraordinary price run-up far exceeds the threshold for when a crash becomes nearly certain.

This study, titled “Bubbles for Fama,” was published earlier this year by the National Bureau of Economic Research. Its authors are Robin Greenwood, a finance and banking professor at Harvard Business School and chair of its Behavioral Finance and Financial Stability project; Andrei Shleifer, an economics professor at Harvard University; and Yang You, a Ph.D. candidate at that institution.

The researchers defined a bubble as a sharp price run-up over a two-year followed by at least a 40% drop over the subsequent two years. When the price run-up is 100% or more, they found the probability of a crash becomes 50%. When focusing on price run-ups of at least 150%, that probability becomes 80%. As price run-ups become even bigger, a crash becomes “nearly certain.”


To put those thresholds in context, consider that bitcoin’s runup over the last two years is nearly 2,500%. That’s more than 10 times greater than the threshold the researchers found was associated with a “near certain” subsequent crash.




To be sure, the authors focused on the stock market in their study, not crypto-currencies. But I nevertheless am confident that their conclusions apply to bitcoin too, since they analyzed nearly a century’s worth of historical data, both in the U.S. and in foreign stock markets as well, and found broadly similar conclusions regardless of the time period or the country.


Bitcoin eyes $10,000 milestone as 'mesmerizing' performance continues
They furthermore were unable to find any evidence that the probability of a crash was dependent on any fundamental factors. That’s a crucial detail, since many of bitcoin’s true believers insist that the fundamental case for bitcoin is unique, and that therefore historical precedents don’t apply. Yet every prior bubble was accompanied by similar claims of historical uniqueness. (Can you say “dot-com bubble”?)

It’s often said that the four most dangerous words in investing are “this time is different.” Bitcoin investors in particular should not forget that.


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