Bitcoin has long been prone to violent price swings, leaving investors wondering what prompted the moves up or down. New research from Yale University tries to answer that, finding it a lot has to do with momentum and interest on the part of investors. (See also: Crypto Market Caps Plummet on Bitcoin ETF Woes.)
Yale economics professor Aleh Tsyvinski and economics Ph.D. candidate Yukun Liu pored over price data for bitcoin, ripple (XRP) and ethereum, the three leading digital tokens, spanning seven years from 2011 to 2018, and found momentum tends to drive the price of bitcoin higher.
Momentum Drives Prices
In an interview with CNBC, Tsyvinski said that if the price of bitcoin was increasing by a lot during the course of a week, it's more likely that the price will continue to rise in the next week as well. "If things go up, they continue to go up on average, and if things go down, they continue to go down,” he said in the interview, noting that the same can be true of stocks, bonds and currencies.
The researchers concluded that in hindsight the best time to buy bitcoin would be when the price jumped by a lot and then sell seven days after that. Had investors followed this strategy when bitcoin was up 20% they would have made an 11% return. The momentum strategy did better with bitcoin than for XRP, noted CNBC. (See also: 'Pump And Dump' Hits Cryptocurrency Market.)
Investor Interest Helps, Hurts Digital Tokens
In addition to momentum, the researchers found investor attention in cryptocurrencies impacted the price movement of the digital tokens. The Yale researchers looked at Google searches for bitcoin and found that an increase in positive inquiries about bitcoin made it more likely the price would increase.
The researchers said that for bitcoin, Google searches predict returns one and two weeks ahead. For ripple, Google searches are an indicator for returns one week ahead, while Google searches for ethereum can predict returns one week, three weeks and six weeks ahead.
But it's not just Google searches that can serve as an indicator. CNBC noted that Twitter can also provide an indication of where cryptocurrency is heading. “A one-standard-deviation increase in the Twitter post count for the word 'bitcoin' yields a 2.50 percent increase in the 1-week ahead Bitcoin returns," the researchers said in the report. Google searches that are negative—"bitcoin hack" for an example—can result in the reverse, predicting a future decline in the price of the digital token.
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