Invest in Bitcoin – When Momentum and Investor Attention is high!


So, when is the best time to buy bitcoin? This is by no means an easy question especially when dealing with such a volatile assets as cryptocurrencies. Traditional tools for analysing more traditional investments do not necessarily apply here. Despite the turbulence, we can still glean on some patterns. That’s exactly what some two Yale University economists have been doing.

Aleh Tsyvinski and Yukun Liu analysed bitcoin price data for a period of seven and compared the pattern to ethereum and ripple. What did they find?

The findings which are published in the National Bureau of Economic Research reveal what we have known all along about bitcoin and other cryptocurrencies. Their behaviour have little in correlation with what we know about other currencies, stocks or even commodities.

In other words, the cryptocurrency market can only be analysed on its own terms.

“The cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets,” the study says.

“We establish that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals,” the study finds out.

“Specifically, we determine that there is a strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns.”

Momentum effect

What this means is that your best bet is when the market is performing well. Specifically, the researchers found that the best time to buy bitcoin is when it has been performing at more than 20% in the previous week. You should then sell within seven days of buying according to the study. You can make about 11% if you follow this strategy, they say.

Sounds interesting? Well, the cryptocurrency market is still driven to a great extent by speculation. If prices go up, more people are likely to join the bandwagon expecting to make some profits. This is not an entirely new phenomenon. Momentum is a good indicator of how an asset will perform in the short term, even in the stock market.

At the same time, many are willing to jump at the slightest sign of trouble. The fact that the market is still relatively thinly traded means that any slight movements can reverberate across the market.

Investor Attention

Interestingly, internet searches of bitcoin is also a good predictor of how it will perform. A spike will usually see it performing well one or two weeks ahead.

The same applies for Ripple and Ethereum with searches predicting Ripple’s performance a week ahead and 1-week, 3-week and 6-week returns for Ethereum.

Twitter posts are also statistically significant.

Negative attention

Of course there are more unpredictable factors like regulation and bitcoin hacks. In fact an increase in searches for the terms bitcoin hack can predict poor performance.

The study also finds that “cryptocurrency returns have low exposures to traditional asset classes – stocks, currencies, and commodities.” It also finds that supply factors such mining costs are not statistically significant in predicting cryptocurrency prices.

Will bitcoin’s value crash to zero?

Will bitcoin’s value tumble down to zero as some critics have argued? According to this study, this scenario is very unlikely. Per their calculations, chances of the crypto falling to nothing currently stands at 0.3%. While the probabilities are higher than other traditional currencies like the pound sterling, this possibility is still small.

Obviously, the study is not meant as financial advice. As always, it is important to do your own due diligence before buying bitcoin or any other form of investment. According to the study, you should hold anything between 1-6% in cryptocurrencies.

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