Connecticut-based Yale University has produced another insightful Bitcoin theory, this time claiming to have found the most significant predictors for the value of Bitcoin.
The momentum effect
The momentum effect describes the usual course of the price that tends to move in the same general direction that it has been. For example, if Bitcoin has seen a significant increase of around 20% in one week, the theory suggests that historical market evidence indicates that upward trend to continue at least one more week.
In short, if you are looking to call the next movements in the market, check to see what the latest trend has been and this can be the best indicator for a cryptocurrency’s next movements.
Investor attention
Investor attention refers to the measure of hype or fear, uncertainty and despair (FUD) surrounding cryptocurrency. Significant price increases are preluded by a spike in the number of search engine increases and media attention, with Google in particular cited as a strong predictor for the forthcoming price changes. According to the research, a jump in the number of times Bitcoin is Googled can consistently predict a price increase several weeks beforehand.
Ripple and Ethereum show similar trends in line with Google searches, although with different timelines.
An increase of negative cryptocurrency searches that incorporate terms such as hacks or crime can also be an indicator for prices, this time showing that the price will soon drop.
Market sentiment
The Yale economists behind the research acknowledge in the paper that the price of cryptocurrencies cannot be predicted by the same methods of the stock market or precious metals, noting that what drives cryptocurrency prices is unique to the market itself. They outline that this is because cryptocurrency is unaffected by macroeconomic or familiar stock market factors.
Instead, the two key predictive tools of investor attention and the momentum effect are ways of gauging market sentiment. Considering that the market remains in its relative infancy, it seems logical sentiment is still such a significant force.
The research was published in a National Bureau of Economic Research working paper by Yale economists Yukun Liu and Aleh Tsyvinski.
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