Yale Study Identifies Cryptocurrency Price Movers

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Yale Study Identifies Cryptocurrency Price Movers

Bitcoin has historically been prone to wild price fluctuations, leaving investors perplexed as to what caused the ups and downs. New Yale University study attempts to address this question, discovering that it has a lot to do with investor momentum and interest. (See also: Crypto Market Caps Drop Due to Bitcoin ETF Issues.)

Yale economics professor Aleh Tsyvinski and economics Ph.D. candidate Yukun Liu examined price data for bitcoin, ripple (XRP), and ethereum, the three biggest digital currencies, from 2011 to 2018, and discovered that momentum tends to propel bitcoin’s price upward.

Momentum Drives Prices

Tsyvinski told CNBC that if the price of bitcoin rises significantly over the course of a week, it’s more probable that the price would climb again the following week. “If things go up, they go up on average, and if things go down, they go down,” he added in the interview, adding that stocks, bonds, and currencies may all do the same.

The researchers determined that, in retrospect, the optimal moment to acquire bitcoin would be when the price skyrocketed and then sell seven days later. If investors had used this technique while bitcoin was up 20%, they would have generated an 11% profit. CNBC reported that the momentum technique performed better with bitcoin than with XRP. (Also see: ‘Pump And Dump’ Hits the Cryptocurrency Market.)

Investor Interest Helps, Hurts Digital Tokens

In addition to momentum, the researchers discovered that investor interest in cryptocurrencies influenced the price movement of digital tokens. The Yale researchers examined Google searches for bitcoin and discovered that an increase in favorable enquiries about bitcoin increased the likelihood that the price would rise.

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According to the study, Google searches for bitcoin forecast responses one to two weeks in advance. Google searches for ripple can forecast results one week in advance, whereas Google searches for ethereum can predict returns one week, three weeks, and six weeks in advance.

However, Google searches are not the only source of information. Twitter, according to CNBC, may also give insight into where bitcoin is headed. “A one-standard deviation increase in the number of tweets including the term ‘bitcoin’ provides a 2.50 percent rise in 1-week ahead Bitcoin returns,” the researchers said in their analysis. Negative Google searches, such as “bitcoin hack,” might have the opposite effect, anticipating a future drop in the price of the digital asset.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site.

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