Can We Predict Crypto Price Trends? Yale Researchers Think So

The volatility of cryptocurrencies don't make predicting trends easy, but now, a group of Yale researchers says they just might have this little issue fixed.

Crypto Price

An article from Yale News published August 6 says Yale University financial experts have suggested a system of factors they say can predict price trends in major cryptocurrencies.

Yale economist Aleh Tsyvinski and Yukun Liu, a Ph.D. candidate in the Department of Economics conducted the study. The study is reportedly the “first-ever comprehensive economic analysis of cryptocurrency and the blockchain technology.”

Tracking Crypto Trends

Aleh Tsyvinski
Aleh Tsyvinski

The authors say they intend to provide what they say is a “risk-return tradeoff” of major cryptocurrencies using its historical performance data as a guide.

The researchers analyzed Bitcoin behavior between 2011 and 2018 while Ripple and Ethereum were tracked since their launch in 2012 and 2015, respectively.

Tsyvinski and Liu say in their study that cryptocurrencies have no exposure to most stock markets, as well as to returns of currencies and commodities and macroeconomic factors. The researchers emphasize that “cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets.”

Co-author Yukun Liu
Co-author Yukun Liu

One such factor, they say, is a “strong time-series momentum effect.” The researchers argue that if the price of Bitcoin increases over a week, it will likely continue growing over the following week. They noted that a sharp increase in Bitcoin’s price tends to stimulate demand, leading to bigger investments. They say that while the effect was stronger for Bitcoin, it is still held significant effects on Ethereum and Ripple.

Aside from the momentum effect, the Yale researchers mention investor attention as another factor that can affect price trends. Finally, Tsyvinski concludes that:

“Keep in mind that we’re not offering investment advice, but it is a very basic question that one would ask about any asset class, and we approach the question at the end of our study. When you invest in your retirement, Vanguard or whatever platform you use will suggest how to best allocate your portfolio. We did the same for cryptocurrency. If you as an investor believe that Bitcoin will perform as well as it has historically, then you should hold 6% of your portfolio in Bitcoin. If you believe that it will do half as well, you should hold 4%. In all other circumstances, if you think it will do much worse, then you should still hold 1%. Of course, one has to remember that, as with any other assets, past performance is not a guarantee of future returns. Maybe cryptocurrency will completely change its behavior, but currently, the market does not think it will.”

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