Two Yale Economists Share the Best Time to Buy Bitcoin
January 4, 2021 (Investorideas.com Newswire) The price of Bitcoin, like that of any other decentralized currency, is affected by wild swings. For instance, at the beginning of 2017, Bitcoin's price was less than $1,000. By December 2017, the price of one Bitcoin had risen to $19,000 before it dropped again.
With such drastic price swings, the average investor might find it challenging to understand where the cryptocurrency is headed. But, according to a 2018 report by two Yale University economists, there are two indicators you can use to predict where Bitcoin's price is headed.
The reports author's professor Aleh Tsyvinski and Ph.D. candidate Yukun Liu analyzed historical price patterns to "formulate and investigate potential predictors for cryptocurrency returns." They studied Bitcoin prices from 2011 to 2018and also studied Ether and XRP for the years they have been in existence. Ripple and Ether were included in the study to determine whether the prices of other cryptocurrencies behaved like that of Bitcoin.
Although historical data cannot guarantee the future performance of a cryptocurrency, Tsyvinski and Liu's research reveals two factors that can be meaningful pricing tools for predicting Bitcoin's next move: momentum and investor attention.
The momentum effect
The first significant factor that affects the price of Bitcoin is momentum. According to the report, Bitcoin's price is likely to continue increasing if it has already been increasing sharply for the past week.
"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," said Tsyvinski. This is true, at least in the short term. Momentum has been documented in conventional assets such as stocks, currencies, and bonds, and Tsyvinski says the pattern is the same in cryptocurrencies.
When concluding, Tsyvinski and Liu stated that the best historical strategy would be to buy Bitcoin after it has had a sharp increase of about 20% in the previous week and sell just seven days after purchase. Tsyvinski further explains that if an investor had used the strategy for the periods that the study was conducted, they would have made an 11% return. Bitcoin showed a more substantial momentum effect than the other two cryptocurrencies studied. However, the report shows that their results for Ether and XRP were still statistically significant.
The investor attention effect
The second factor that affects the price of Bitcoin is the level of interest and hype around cryptocurrencies. The hype is measured by investor's online activity such as searching and posting.
When studying the analysis of searches on Google for Bitcoin, the conclusion of the report was: "for weekly returns, the Google search proxy statistically significantly predicts 1-week and 2-week ahead returns." That means that when there is more searching online about Bitcoin, it was likely that Bitcoin's price would increase in the following week.
For Ether, "the goggle search proxy statistically significantly predicts 1-week, 3-week, and 6-week ahead returns, and for XRP, "the Google search proxy statistically significantly predicts 1-week ahead returns.
The number of Bitcoin-related posts on Twitter also shows the level of investor attention. According to historical data, when the Twitter posts count increased by one standard deviation, it is likely that Bitcoin returns for the following week would be 2.50%. This means that by buying Bitcoin in your cryptocurrency exchange account during the week of the increased Twitter postings then you will make a 2.5% profit the following week.
Negative investor attention can be used to predict downturns. When there were repeated searches for the term Bitcoin hack, the price of Bitcoin decreased.
Although Tsyvinski and Liu are not giving investment advice, their study sheds light on how an investor can tell when to purchase or sell Bitcoin to make a profit. However, it is essential to remember that there are numerous factors, such as international regulation, that affect the crypto market at any time.
Tsyvinski urges investors to keep in mind the fact that anything can happen. The statistical patterns that he and Liu found can change. Regulations can also outlaw bitcoin at any time, so it's essential to take caution before investing.
Author bio: Richard Bertch is a contributing finance author at ChamberofCommerce.com and freelance writer about all things business, finance and productivity. With over 10 years of copywriting experience, Richard has worked with brands ranging from Quickbooks to Oracle creating insightful whitepapers, conversion focused product pages and thought leadership blog posts. Richard can be reached at richardbertch@gmail.com.
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