BBC News reports that Swiss researchers have found that surges in web search volume are often precursors to major price action.
They posit that two positive feedback loops, or vicious cycles, take place in a given price cycle. First, the “reinforcement cycle” involves an increase in searches for information on bitcoins. This leads to more chatter on the topic and stimulates a rise in value. Price surges occur because of greater public attention.
Second, the growing popularity motivates people into action like downloading wallets and joining mining pools. The greater hands on activity further fuels the rise in price.
The researchers write:
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“Our analysis suggests that the successive waves of growth of the Bitcoin economy were driven by corresponding waves of new users from public circles gradually opening to the currency”
At first glance, one can argue that the research trivial. In today’s web driven world of information, bubbles and large price swings for many different assets are closely correlated with increased search traffic. However, there are at least 3 factors making Bitcoin unique in this regard.
First, Bitcoin’s entire existence is based on the internet. The same can’t be said for gold, silver etc. The internet is the lifeline for Bitcoin enthusiasts and traders. The two ecosystems are inseparable.
Second, the wheels behind Bitcoin’s price action are different from other assets. Take for example a stock. Major price swings often transpire after unexpected events like profit warnings, merger announcements, analyst upgrades, etc. Also notable is reaction after a much anticipated earnings report, although search traffic can rise prior to such an event as well. In Bitcoin’s case, while unexpected surprises do happen from time to time, much of the price action has been driven by speculation. And there is no better vehicle for speculation than the internet.
Third, most Bitcoin investors are part of the do it yourself crowd. Naturally, this involves research of commonly available info on the web. While this is partially true for other assets, a large of chunk of portfolios are managed by institutions using more diverse means of primary research.