Search engine queries can predict bitcoin prices

Economists are licking their chops thanks to bitcoin’s public ledger and the fact that the cryptocurrency is completely digital. Perhaps, for the first time, they can see exactly how supply and demand affect prices. And they can correlate those price movements with various factors like supply and demand, fiat exchange rates, the price of gold and even the number of search engine queries that take place in a given time.

Ladislav Kristoufek of the Charles University in Prague, Czech Republic, recently released a bitcoin study (arxiv.org/abs/1406.0268) that demonstrates how search activity can help predict short-term price movements in bitcoin.

Bitcoin-related Google and Wikipedia queries “are positively correlated with the Bitcoin price in the long run,” Kristoufek writes. “For both, we observe that the relationship somewhat changes in time. In the first third of the analyzed period, the relationship is lead by the prices whereas in the last third of the period, the search queries lead the prices.”

My interpretation? He’s saying that prices hikes outpaced search queries at the start of a bull run in bitcoin prices. When search queries outpace price movements, bitcoin could be due for a correction. That could be a clue for bitcoin daytraders to monitor. There is a caveat though:

“Unfortunately, the most interesting dynamics remains hidden in the cone of influence and it is thus not too reliable,” Kristoufek continues. “Apart from the long run, there are several significant episodes at the lower scales with varying phase direction hinting that the relationship between search queries and prices depends on the price behavior. Moving to the safe haven region, we find no strong and lasting relationship between the Bitcoin price and either the Financial stress index or gold price.”

I’m surprised he found little correlation between the Financial stress index and gold price, but that makes me optimistic about the future price of bitcoin because I believe the currency will ultimately win over a decent chunk of the gold bug crowd.

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