The world has seen some dramatic fluctuations in the price of bitcoin and it is quite understandable as the cryptocurrency is not backed by any government.
On Wednesday, bitcoin’s price dipped by over 8 percent after the Security and Exchange Commission delayed the decision in a new kind of financial product around the cryptocurrency. At present bitcoin’s price according to the coin market cap is $6381 USD.
Last year, bitcoin started from under $1000 USD and its value rose to $19,000 in December before it started dipping. So, it seems almost impossible for average investors to fathom the way digital currency functions in terms of price fluctuations.
A recent report by economists at Yale University analyzes historical price patterns and suggests there are two indicators that one can make use of in order to predict the price of bitcoin.
The authors of the report seek to investigate potential predictors for cryptocurrency returns and they did so by keeping into account data on price changes of bitcoin, Ripple and Ethereum over the past seven years. While the price of bitcoin was studied starting from 2011, Ripple’s XRP and Ehereum’s ether data was studied since their launch in 2012 and 2015.
Th historical data gives no guarantee for their future performance but this helps to understand the factors that affect price od digital currencies:
The momentum effect
The first significant indicator is momentum. The report indicates that if the price of bitcoin rises impressively in one week, it would most likely rise next week as well, one of the authors, Tsyvinski told CNBC Make It.
Tsyvinski believes momentum is simple, if things go up they continue the pattern and if things are going down, they will further go down for a while in the short run. The same pattern is observed in mainstream assets like stocks and bonds. The authors, Tsyvinski and Liu suggest the when the price of bitcoin starts rising sharply in a week, investors can buy and then sell at the end of the week. Also, the report suggested that the momentum effect is stronger for bitcoin as compared to other two cryptocurrencies studied.
The increased interest in cryptocurrencies
The second factor according to Tsyvinski and Liu is the increase in interest observed in cryptocurrencies. When the investors and influencers start searching and posting online in favor of cryptocurrencies, the price increases.
Taking a look at the analysis of searches on Google for bitcoin, the report states,
“for weekly returns, the Google search proxy statistically significantly predicts 1-week and 2-week ahead returns.” This means that if the searches of bitcoin increased on Google, it was a clear indicator that the price would also increase. Similarly, the increased posts on twitter related to bitcoin was also a significant predictor in an increase of its price. And increased searches of the terms like bitcoin hack indicated bitcoin price is going to drop.
