Market Sentiment and the Price of Bitcoin
The explosion in the price of bitcoin during 2017, specifically the latter half of the year, was fairly unprecedented. This is despite the bragging of the I-told-you-so-ers out there who have been claiming bitcoin’s value for years. Yes, they were right in a way. But, experts in financials are scrambling to fully understand what this means for the future of the currency and where the limit really is. Aside from the value of the currency though, the question remains of why? And why now?
Experts are scrambling to understand this market fully, and though many dismiss it as a hiccup in the otherwise reasonably predictable world of finance, others see it as an opportunity to learn more about markets and the human nature that runs them.
Unsurprisingly, those who have the most understanding in crypto-economics tend to not have the loudest voices as of yet. Which isn’t surprising considering the newness and complexity of these markets, yet a few good theories on the nature of high performance in cryptos have emerged in this past year.
One of these was written back on December 15, 2017, by Yoshiharu “Josh” Sato. Josh works as an adviser for a couple of crypto startups and has been in the markets as a derivative trader since 2008, eventually specializing in Algorithmic and HFT trading in 2012. As a new face in the business and an understanding that the future of financials is changing, he has been put in an excellent spot to look at what occurred to bitcoin in 2017.
The reason bitcoin tends to mess with financial experts’ heads so much is, beyond it being a new technology, there really is no set intrinsic value for the currency. Standard models for the value of a currency depends on the supply, which for bitcoin is known at a maximum of 21 million, and its value to generate interest and dividends.
Bitcoin, however, does not work this way and trying to shoehorn various takes on the standard model onto the coin has thus-so-far been a very inaccurate way to place a value on the crypto.
Instead of this process, the theory Josh is promoting takes less out of the standard market outlook and more into the market sentiment of the coin. Specifically, he is looking at trends of positivity on Twitter and StockTwits.
By collecting and charting data from both Twitter and StockTwits and then plotting them according to Metcalfe’s law, the idea that a communication network’s value is proportional to the number of connected nodes within the network, they were able to plot bitcoin’s rise during 2017 accurately.
What this goes to say is that bitcoin’s price is intrinsically tied to how people feel about it, if it’s positive the price goes up which leads to more positivity and feeds back on itself creating a boom. The reverse occurs as well creating these large busts.
Though this may seem obvious to anyone following the coin, a way to accurately track these booms has never quite been found. By analyzing social media like this, Josh and his team may have finally found a way. However, previous studies have dismissed the effect of media buzz surrounding a cryptocurrency, pointing to technological innovation as the main driver of price trends.