If Bitcoin is widely known for one thing it’s – volatility. The price can change rapidly and unpredictably acting as a major deterrent for many casual investors from seeing Bitcoin as a viable investment option.
However, a pair of Yale economists might have cracked the code to Bitcoin’s ongoing unpredictability.
Highs and Lows
Bitcoin is notorious for rapidly alternating between highs and lows. In December of 2017, the cryptocurrency reached a peak value of almost $20,000 before falling back down. This week has seen Bitcoin enter a prolonged downwards slide which, at the time of this writing, has shown no signs of slowing.
After analyzing years worth of price data spanning from 2011 to 2018, a pair of economists from Yale University believe that they have discovered two key indicators which could be used to make much more accurate predictions on Bitcoin’s price than have previously been possible.
What Goes Up Must Come Down?
Not necessarily. As reported by CNBC the first of the two indicators is momentum or the “momentum effect”. This refers to a sustained trend in Bitcoin’s price over a one, to two week period.
Economics professor Aleh Tsyvinski explained that when Bitcoin is experiencing a strong price increase, it is generally able to sustain it. “Momentum is actually something simple,” he says. “If things go up, they continue to go up on average, and if things go down, they continue to go down,”
In fact, according to the paper, historical data determined that buying Bitcoin just after a sharp spike in price, then selling 7 days later, provided the most reliable returns.
Gauging Investor Interest
Secondly, Tsyvinski and Liu found that there was a strong correlation between the amount of “Bitcoin” Google searches performed leading up to a rise in value. When searches for Bitcoin experienced a spike, a rise in value was soon to follow.
The report concluded that “for weekly returns, the Google search proxy statistically significantly predicts 1-week and 2-week ahead returns.” Meaning the more searches there are for Bitcoin at any given time, the more likely a price increase is to follow.
Given that the information about Google Trends needed to use this strategy is easily accessible to the public makes this an exciting discovery for retail investors.
Despite the seemingly unpredictable nature of Bitcoin, it remains as one of the most appealing investment opportunities for those with low market capital due to its potential future returns. This new research could potentially help mitigate some anxiety and encourage more people to have a crack at cryptocurrency investing.