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.