Two economists from Yale University have outlined a basic strategy for identifying the best buying opportunities for cryptocurrencies. They studied the past performance of three of the most well-known digital cryptocurrencies [Bitcoin, Ethereum, and Ripple] and identified a couple of methods to predict price movements.
Professor Aleh Tsyvinski and economics Ph.D candidate Yukun Liu believe they have identified two factors that can provide useful indication as to how the price will move. In a paper titled Risks and Returns of Cryptocurrency, they explored historical price patterns in order to identify factors that could determine how the price will move over a short period of time.
The pair studied price movements for Bitcoin between 2011 to 2018, 2015 to 2018 for Ethereum, and 2012 to 2018 for Ripple. They were able to identify two factors, the “momentum effect” and the “investor attention effect,” that gave an indication as to how the price would move.
The first factor identified by Liu and Tsyvinsky was momentum. In the report, the economists noted that if the price of Bitcoin increased rapidly during a single week, it would likely continue to increase during the following week. In an interview with CNBC, Tsyvinsky explained, “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.”
The report goes on to state that the most risk-free strategy for trading digital assets using the momentum effect was to buy said currency following a week in which the price had experienced a sharp upwards trend – around 20% – and to sell another week later.
The second factor highlighted in the report is the “investor attention effect.” This means that the amount of interest surrounding cryptocurrencies at any given time could be used to predict price movements. In the report, they stated that Google trends and Twitter posts gave good indications of investor attention. They wrote, “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.”
Meanwhile, the opposite also holds true. For example, rises in the number of searches for phrases such as “Bitcoin hack” were indicative of lower prices.
However, during the report, the two stressed that they are not giving advice to investors. They also concluded that their metrics are not standard rules. Tsyvinsky told CNBC of the risks posed to crypto traders by saying, “All things can happen…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.”