Researchers at Yale University have carried out a ground-breaking study to investigate the possibility of accurately predicting Bitcoin and cryptocurrency price trends. The study is touted as being the first ever comprehensive economic analysis of blockchain technology and virtual currencies.
The Premise of the Study
Price volatility continues to be a ubiquitous condition in the still-developing cryptocurrency market. Wild price swings are a common theme for virtual currencies that can be on the uptrend one minute and be hitting a new price bottom the next minute. Sometimes the dips and surges are preceded by significant events, and other times they appear to happen on a whim.
Based on the situation thus described, it may seem that everyday investors are confined to forever be tossed hither and thither by the market.
The research aimed to develop a risk-return tradeoff framework for popular cryptocurrencies like Bitcoin, Ethereum, and XRP. Researchers Tsyvinski and Liu analyzed Bitcoin trends since 2011, when trading became established, plus Ethereum and XRP trends from 2015 and 2012 respectively.
Two Factors that Affect Bitcoin Price Trends
One of the major findings unearthed in the study is that there is no correlation between the cryptocurrency market and the factors that affect the mainstream stock market. Some experts have in the past declared that mainstream business approach doesn’t work well in the virtual currency space.
The researchers did, however, discover two factors that seem to affect the price trends of cryptocurrencies. The first trend called the “momentum effect,” describes Bitcoin builds momentum if it increases sharply within a week. This momentum usually extends to the following week.
Commenting on this factor, Tsyvinski said, “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.”
Based on their findings, the researchers concluded that using the momentum effect, the best time to buy BTC is after it has recorded a 20 percent increase in the space of seven days. After that, the trader should sell BTC a week after buying it.
For the second factor, called “the investor attention effect”, the researchers said that market interest and hype played a significant role in determining the price trajectory of cryptocurrencies.
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