New paper finds that Twitter, Google Trends can help predict crypto price fluctuations
The Southern Methodist University recently put out a research paper that found a couple of standout facts regarding the cryptocurrency industry. Most notable is the finding that tweet count and Google search trends can help predict when crypto prices are about to change.
Correlation is key
That’s right. As reported by
Bitcoinist, the paper notes that despite the volatile market and
prices regarding Bitcoin and Ethereum, it’s possible to predict potential
changes when factoring in user sentiment:
“Twitter is increasingly used as a news
source influencing purchase decisions by informing users of the currency and
its increasing popularity. As a result, understanding the impact of tweets on
price direction can provide a purchasing and selling advantage to a
cryptocurrency user or a trader. By analyzing tweets, we found that tweet
volume, rather than tweet sentiment (which is invariably overall positive
regardless of price direction), is a predictor of price direction.”
Of course, the paper uses Bitcoin and Ethereum because of the
popularity of the two. Cryptocurrency
wallets are full of these assets, and companies are
consistently trying to make Bitcoin trading much easier than it has
been. These currencies are tweeted about the most often, hence they make a
great model for studying.
However, the University made sure to tie this in with another
big source, Google Trends:
“By utilizing a linear model that takes as
(sic) input tweets and Google Trends data, we were able to accurately predict
the direction of price changes. By utilizing this model, a person is able to
make better informed purchase and selling decisions related to Bitcoin and
Ethereum.”
How accurate are these findings?
Interestingly, in their research, the group found that
“sentiment analysis is less effective for cryptocurrency price changes in an
environment in which prices are falling”. This is because tweets about crypto
and blockchain tend to lean towards the positive side or are neutral.
Cryptocurrencies are not mainstream. Those who tweet about them
generally have a “special interest” in the technology which is why you don’t
see much negativity within them. Put simply, it is then the number of tweets,
not so much the emotions within them, that alter cryptocurrency prices.
Of course, one has to account for bots on Twitter. There are all
sorts of fake Twitter accounts within the cryptocurrency space – some of which
promote Bitcoin robot scams.
Regardless, it’s not always clear when an account is a bot, meaning their
tweets will still factor into the reception of cryptoassets.
As for the results, the team found that Google Trends searches
for Bitcoin and Ethereum would jump up before prices did the same. The same
happens with Bitcoin and tweets regarding it.
These findings may seem obvious, but they show that user
interest can in fact change crypto prices,
rather than the common belief that tweets and online discussion follow price
changes.
Please note: insidebitcoins.com
is not a financial advisor. Do your own research before investing your funds in
any financial asset or presented product or event. We are not responsible for
your investing results.
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