Yale University economists have invented a technique to predict the price of bitcoins based on the past behavior of cryptocurrency.
The notoriously volatile cryptocurrency has fluctuated between $ 6,000 and $ 9,000 in recent months, with its current value suspended around $ 6,343, yet there are models within these market movements.
Yukun Liu and Aleh Tsyvinski analyzed seven years of bitcoin price data to understand which indicators can be used to determine the future price of bitcoins. Yale economists also studied ripple and ethereum to see if other cryptocurrencies followed the same bitcoin price patterns.
Their findings, published in the The National Office of Economic Research have established that bitcoins and other cryptocurrencies are completely separate from shares, currencies and other commodities in terms of factors that influence their market movements
"On the contrary, we show that cryptocurrency returns can be predicted by market-specific factors of cryptocurrencies, "explains the study.
"In particular, we establish that there is a strong momentum effect in time series and that proxies for investors' attention strongly predict the return of cryptocurrency."
This momentum effect was found to strongly influence cryptocurrency, which means that if bitcoin is working well then it is likely to continue to do so, at least in the short term.
Economists have designed a "simple strategy" that investors could follow to take advantage of this trend. According to the strategy, an investor should buy bitcoins if its value increases by more than 20% in the previous week.
Economists also calculated that there is a probability of 0.3% that the value of the bitcoin falls to zero and becomes useless. This may seem very small, however it is still of varying degrees of magnitude compared to traditional currencies such as the euro (0.009% probability) and the Australian dollar (0.003% probability).
The end of the study concerned the question of how much a typical investor should keep in bitcoin and cryptocurrencies, concluding that it should be between 1% and 6%.
"Obviously, we must remember that, as with any other assets, past performance is not a guarantee of future returns," said Tsyvinski.
"Perhaps the cryptocurrency will completely change its behavior, but currently the market does not think it will."