Crypto Price Prediction System Developed by Yale Economists

 In Altcoins

Yale University researchers have suggested a system of factors for crypto price prediction.

Yale University financial experts have outlined a basic strategy for identifying the best buying opportunities for some of the largest cryptocurrencies by market capitalization.

Yale economics professor Aleh Tsyvinski and economics Ph.D. candidate Yukun Liu, have studied the historical price trends of Bitcoin (BTC), Ripple (XRP) and Ethereum (ETH). The BTC data was tracked between 2011 and 2018, while the XRP and ETH performance was analyzed since their inception in 2012 and 2015, respectively. The economists described their findings in a report titled “Risks and Returns of Cryptocurrency”, published on Monday.

Tsyvinski and Liu say in the paper that cryptocurrencies have “low exposure” to traditional asset classes, such as stock, currencies and commodities. The research also calls into question popular explanations that supply factors such as mining costs, price-to-dividend ratio, or realized volatility are useful for predicting the behavior of cryptocurrency returns. Instead, the researchers assert that “cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets.”

Momentum effect and investor attention

The economists have identified two factors to predict the crypto assets’ future performance. The first is called the momentum effect, which basically means that when a cryptocurrency increases in value, it will tend to rise even higher. This trend applies to Bitcoin more, but is “still statistically significant” for Ethereum and Ripple. To take advantage of momentum effect, the experts suggest an investor should buy Bitcoin if its value increases more than 20% in the previous week.

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The second factor strongly influencing cryptocurrency is the measure of investor attention, which is a correlation between crypto prices and the number of posts and queries for cryptocurrencies on social media and in search engines. High investor attention predicts high future returns over 1-2 week horizons for Bitcoin, a 1-week horizon for Ripple, and 1-, 3-, and 6-week horizons for Ethereum, the paper explains.

“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,” Tsyvinski stated in an interview published on Yales’ website.

Every portfolio should include at least 6% Bitcoin

According to the Yales financial experts, Bitcoin should be an imperative part of investors’ portfolio. For an optimal construction of one’s portfolio, the economists hold that Bitcoin should account for at least 6% of it. Those who are less enthusiastic about the oldest cryptocurrency should hold 4% of it. Regardless of one’s position on the matter, however, BTC should comprise a minimum of 1% of investor’s portfolio for diversification purposes.

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