Since inception, the cryptocurrency market’s wild price swings have flummoxed traders and investors alike. Technicians have proposed several theories to accurately predict price movement, but none have proved consistent.
The National Bureau of Economic Research (NBER), a non-profit, recently released a paper that attempts to identify factors responsible for price movement in cryptocurrency markets. According to the paper, high investor attention, generally expressed through Google searches and Twitter posts, is an indicator of returns for well-known cryptocurrencies. Specifically, positive Google searches translate to increased prices within 1-2 week horizons for bitcoin, a 1-week horizon for Ripple, and 1-, 3-, and 6-week horizons for Ethereum. Twitter post counts are also an important indicator of prices for bitcoin. A one-standard-deviation (or deviation from a set of preceding values) increase in Twitter post count yields a 2-week-ahead bitcoin return, the paper’s authors write.
What About Negative Returns?
Google searches for bitcoin are not always positive, considering the number of hacks and scandals that have plagued the cryptocurrency. In that respect, negative Google searches correlate with price declines for bitcoin. The researchers at NBER constructed a ratio between Google searches for “Bitcoin Hack” and “Bitcoin” and found that standard deviations in the ratio resulted in a 2.75 percent decrease in bitcoin returns the following week.
Among the factors that have no predictive power are “price-to- 'dividend'” ratios for bitcoin and volatile price movements for bitcoin and Ethereum. Ripple returns can be predicted at 4-, 5-, and 7-day-ahead frequencies.
“Our findings cast doubt on popular explanations that the behavior of cryptocurrencies is driven by its [function] as a stake in the future of blockchain technology similar to stocks, as a unit of account similar to currencies, or as a store of value similar to precious metal commodities. At the same time, the returns of cryptocurrency can be predicted by two factors specific to its markets – momentum and [investor] attention,” NBER researchers wrote in conclusion.
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