Yale Data: Best Time to Buy Bitcoin
Bitcoin’s price has fluctuated a great deal recently, but that is no surprise, considering that the cryptocurrency is not backed by a government or financial institution. In one day, Bitcoin’s price has dropped by over 8 percent after the SEC decided to postpone its decision on an ETF application.
Because the cryptocurrency price is prone to fluctuating so much, it can be very difficult for investors to determine when to purchase the digital asset. In an effort to make the process easier for the average investor, Yale University economists released a report analyzing Bitcoin’s historical price and providing insight into two indicators that users can use to determine where the currency is headed.
The report, written by economics professor Aleh Tsyvinski and Ph.D candidate Yukon Liu, formulates and investigates potential predictors for cryptocurrency returns. The paper also analyzes data concerning past prices of Ripple, Ethereum, and Bitcoin. Although historical data does not guarantee future investment performance, it is important to note that the purpose of the paper is not to give financial advice, but to utilize useful tools to help determine the currency’s next state.
Here are the two factors that interested investors can look out:
The “Momentum Effect”
The first factor that investors can look out is momentum. According to Tsyvinsky, “momentum is actually something simple . . . if things go up, they continue to go up on average, and if things go down, they continue to go down.” He further added that if the price increased over one week, then it will likely continue to do so.
If interested investors had applied the momentum strategy to the cryptocurrency by purchasing it after its price had a sharp increase, 20 percent in a single week, and selling it just seven days after buying, they would have profited. He explains, “the investors would have made an 11 percent [return] during the periods we looked at.”
The “Investor Attention Effect”
The second indicator is the amount of interest and hype around the cryptocurrency, which can be assessed by investor searches and online postings. These qualities, called the Investor Attention Effect, can influence the price of the cryptocurrency.
The report concluded that, when looking at an analysis of searches on Google for Bitcoin, “for weekly returns, the Google search proxy statistically significantly predicts 1-week and 2-week ahead returns.” This means that online searches about bitcoin indicates that the price could increase in the coming weeks.
In terms of Ripple, “the Google search proxy statistically significantly predicts 1-week ahead returns.” As for Ethereum, “the Google search proxy statistically significantly predicts 1-week, 3-week, and 6-week ahead returns.”
Additionally, the more posts about Bitcoin on Twitter provides an indication of investor attention. Historical data shows that “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.”
Conversely, negative investor attention can indicate a downtown, and negative searches can do so as well.
Overall, those who are interested in investing in a smarter manner may want to take these indicators into account. As Ysyvinsky states, “All things can happen” and “”Maybe the statistical patterns that we find are going to completely change. Maybe tomorrow bitcoin is going to be prohibited by regulators, maybe it’s going to be completely hacked, there are many things one would take into account.”