Two researchers at Yale University analyzed the historic prices of three cryptocurrencies and found out what factors should be guided when investing in cryptocurrencies.
Aleh Tsyvinski, professor of economics at Yale University, and Yukun Liu, Ph.D. in Economics, studied the historical price data of bitcoin, Ethereum and Ripple. Data on bitcoin were taken for the period from 2011 to 2018, while prices for XRP and ETH are from 2012 and 2015, respectively. The findings were described in the report titled "Risks and Returns of Cryptocurrency".
Tsyvinski and Liu note that cryptocurrencies do not depend much on factors affecting traditional asset classes, such as stocks, currencies or commodities. Instead, the researchers argue, the cryptocurrency market is more susceptible to investors sentiment and the momentum effect. In practice, this is realized as follows: if a cryptocurrency is growing in price, then it will grow even higher. To take advantage of the momentum effect, experts believe, investors should buy cryptocurrency, if its price increased by more than 20% in a week.
The second factor, investors sentiment or attention, is manifested in the correlation between prices of cryptocurrencies and the number of messages in social networks and searches in search engines. The higher it is, the higher the growth rate of cryptocurrency will be.
"For weekly returns, the Google search proxy
statistically significantly predicts 1-week and
2-week ahead returns. A one-standard-.
deviation increase in this week’s searches
leads to increases in weekly returns of 1.84
percent and 2.30 percent at the 1-week
and 2-week ahead returns."
Analysts also come to the conclusion that bitcoin should become an indispensable part of any investment portfolio, regardless of its owner's attitude to cryptocurrencies. Its share should be optimally 6%, but if an investor does not trust cryptocurrencies in total, then bitcoin's share in investment portfolio should be at least 1%