2018 is a bad year for bitcoin and crypto-currency investors in general. Coming off its meteoric (some would say miraculous) rise in 2017, Bitcoin prices are quite far off their all time high price of US$19,206, hitting a new low for the year at US$6060 just this past weekend. While the technology behind Bitcoin, the Blockchain, is slowly being adopted and revolutionizing one industry after another, the crypto-currency markets led by bitcoin seem to be falling by the wayside. Ask any experienced investor and they will tell you, Bitcoin’s chart is looking very bearish, setting lower lows this year every time the crypto-analysts seem to think the market has found a bottom. But, we are not going to talk about the analysts, or blockchain, or crypto-currency investments in this article; rather, what we are going to look at today is Google Trends, and determine whether or not search data might have predicted the rise and fall of bitcoin.
The History Of Financial Market Predictions and Google Trends
The first time I came across a study analyzing data from Google search trends and stock market movements was in 2013, when Tobias Preis of Warwick Business School in the U.K published an article behind the idea of using Google search trends data to predict daily price movements in the DOW Jones industrial average. Among the research outcomes, we learned the following:
“An uptick in Google searches on finance terms reliably predicted a fall in stock prices. “Debt” was the most reliable term for predicting market ups and downs, the researchers found. By going long when “debt” searches dropped and shorting the market when “debt” searches rose, the researchers were able to increase their hypothetical portfolio by 326 percent. (In comparison, a constant buy-and-hold strategy yielded just a 16 percent return.)”
But perhaps the most telling part of this study was a quote I still remember to this day from his Ted Talk a few years ago. In that presentation, Mr. Preis had explained at length how financially relevant search terms are, in relation to investment decisions and their impact to portfolios. If you have the time, I strongly encourage you to watch his Ted Talk, embedded below.
If the stock market reflects the trading and investment decisions people make, then Google Search trends can be used as a tool to track investor sentiment and perhaps learn a little more about what exactly retail investors are thinking. In the image below, we are looking at the search volume for the term “Bitcoin” worldwide over the past 12 months.
The numbers you are reading above, represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means that there was not enough data for this term.
Now let’s take a look at Bitcoin’s price over the same period of time.
Just by looking at these two charts, we can see that search volume for the term Bitcoin, peaks at pretty much exactly the same time as Bitcoin’s price. In kind with Bitcoin’s price, search volumes have collapsed from a multi-year high and is slowly on its way back down to practically zero interest. What should be troubling to investors, particularly those investors who treat Bitcoin as a safe-haven asset, is how both search volume and Bitcoin prices behaved this year at times of crisis. Of course I am talking about the XIV market melt-up in January, followed by the bombing of Syrian chemical weapons facilities in April. If you are in the “Bitcoin is a safe-haven investment” camp, then you need to ask yourself why both the price and apparent retail investor interest in Bitcoins dropped while market volatility was rising.
Did Google Trends Predict The Rise and Fall Of Bitcoin?
So, to answer your question, did Google trends predict the rise and fall of Bitcoin? To keep it brief, it probably did. I understand the evidence presented is rather anecdotal but that being said, it’s hard to deny that search volumes and price movement in the past 12 months appear to be moving in very similar patterns. This data also seems to suggest that the initial Bitcoin investor base has changed; shifting from those who understand how Central Banks are debasing the value of fiat money, those who have a Libertarian laissez faire bend to something entirely different. Personally, I think the price of Bitcoin is currently in a bubble, and will continue hitting new lows from this point onward, as it is clear to me there is very little interest in the Bitcoin and crypto-currency markets in general from retail investors. With investor interest drying up, it will be very hard for Bitcoin to form a stable bottom and enter a bull market cycle. If there is one thing inevitable with Bitcoin is volatility, given it is not backed by any asset in particular, relying on a perpetually fluctuating exchange rate. That in addition to pressure from regulators and competition from what seems like an infinite number of rival cryptocurrency will only rapidly pile on more pressure on Bitcoin’s price.