Since the start of this year when crypto prices started tumbling, people have been seeking a simple answer to an equally simple question: what is making prices fall? To those who have suffered through the trama, you may have already thrown up your hands in disgust. But, this is an important question that needs an answer.
After much reading, many studies place the blame on mechanical features. Most of these studies are pretty far fetched. In reality, price movements in crypto bear remarkable similarity to about every other asset category. In each case, we are dealing with human emotions.
Why is it so important to isolate these factors? Because the very cause of losing more than 65% of its value can also drive Bitcoin back to $19,000. The same is true of most altcoins as well.
So far this year the academic community has shown a fascination with trying to explain cryptocurrency movements based solely on correlation analysis rather than what actually is causing price movements.
The most absurd of these efforts goes back earlier this year when the San Francisco Federal Reserve teamed up with Stanford University to declare that the advent of Bitcoin futures correlated with the bursting of the Bitcoin bubble. It didn’t seem to bother anyone that there were hardly any Bitcoin futures traded in Chicago in December.
This was not the only example, but in the interest of not writing a script for a TV sitcom, the others will just be ignored.
Applause to the workers as Coindesk for putting together a first rate survey of the crypto community. They do an excellent job of finding and presenting data. However a big hole still exists in understanding what all the data means.
For starters, 83% of crypto owners are “unaccredited”. This is a key point. It means their total assets are less than $1 million or they earn less than $200,000 individually. Some 84% of these folks check crypto prices more than once a day and over half check every hour. That is a clear measure of their nervous sensitivity.
Successful investors often use data on this group as a contrary indicator of market direction. If we had this data back in May, we could have saved a bundle. Here is why.
At the end of Q2 2018, 65% of Coindesk survey takers believed crypto prices were undervalued. That is down from the 69% level of Q1 2018. When this falls to something ridiculous like 40%, that will offer a strong crypto buy signal.
Finally Someone Scientific Measures Of The Mind
Skeptics may scoff at this approach as being overly simplistic. After all, with all the available date on things like hashrates, difficulty and mining profitability etc., the secret to price behavior must be far more complex.
Well, according to a Yale University study, Risks and Returns of Cryptocurrency, if you want to make money in crypto, you can forget about hashrates and stuff like that. Here are their two major findings.
Time-Series Momentum Effect (TSME)
This means that when asset or cryptocurrency prices are rising they tend to rise even higher. The authors of the study explain it this way:
“We have designed a simple strategy that says an investor should buy Bitcoin if its value increases more than 20% in the previous week.” “This method can be useful to predict the best time for investors to buy and sell their crypto.”
Traditional stock investors have another term for TSME. It is called FOMO or Fear Of Missing Out a.k.a greed.
Investor Attention Effect
The second key to making a killing in crypto is what they call the “investor attention effect.” If there is an abnormally high number of mentions of the cryptocurrencies we studied in either Google search or on Twitter, returns go up. Here is how things measure up.
A one-standard-deviation increase in bitcoin Google searches over the course of one week leads to increases in weekly returns of 1.84% and 2.30% at the one and two week marks.
Under the same circumstances, Ether investors could reasonably expect a 4.36% gain while Ripple investors would reap 10.86%.
Kudos To Yale
Results of the Yale study tell us that Google and Twitter are a good measures of FOMO. Unfortunately, they have given us a reliable measure for FOLE, Fear Of Losing Everything. For that the Coindesk quarterly survey says that when almost three quarters of crypto owners believe that prices are undervalued, we should run for the hills, FOLE is coming soon.
Featured image courtesy of Shutterstock.