In February this year, the price of bitcoin continued to test the $ 10,000 mark. Online indicators such as tweets and Google search showed that bitcoin's search volume reached its highest level in two years.
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A certain correlation has been established between external factors and the evolution of Bitcoin price. Most notable are social media indicators, which include the number of tweets mentioning a certain cryptocurrency, the number of comments or posts in the cryptocurrency sub-forum, the daily search volume for specific cryptocurrency topics, and even the "Lamborghini" on Reddit Number of times mentioned.
The sentiment analysis based on the above social media data can help investors predict returns and become a new way for traditional investors to reference.
Analyze the association of Twitter and Bitcoin prices from 2017 to 2019
By analyzing the number of Bitcoins mentioned on Twitter every day since 2017, we can find that during the 2017 bull market, the number of Bitcoin tweets has increased significantly. On December 7, 2017, the number of tweets about Bitcoin reached a record 156,600. The daily average of such tweets has fallen sharply during the subsequent 2018 and 2019 periods. During the bitcoin bull market in 2019, the average number of tweets rose slightly on June 26.
Graph of daily tweets from January 2017 to December 2019
The medium-term trend between Twitter and Bitcoin prices suggests that there may be some correlation between these two variables, or in other words, one of the data can predict the other. Unsurprisingly, throughout 2017, the correlation between tweets referring to Bitcoin and the price of Bitcoin reached 0.86, the highest in years.
Correlation 1 means that the Bitcoin price is completely positively correlated with the number of tweets, and -1 means completely negatively correlated. A correlation of 0 means that they do not have any correlation.
Despite the bear market in 2018, the correlation between currency prices and tweets is still high at 0.74. Bitcoin's price rose sharply between March and June 201, but this relationship dropped to 0.12 in 2019.
Correlation between Bitcoin price and daily tweets
Twitter can predict Bitcoin transaction volume
The high correlation between the price of Bitcoin and the number of tweets may make Bitcoin enthusiasts believe that the number of tweets can be used as a reliable indicator of the future price of Bitcoin. However, through the use of similar analysis, we found that there are also significant differences between the number of tweets and the volume of Bitcoin transactions, which is a key factor for investors to analyze technical indicators.
By analyzing the correlation between tweets and Bitcoin transaction volume, we find that the correlation between the two in 2017 is stronger than in 2018 or 2019. In 2017, if the number of tweets referring to Bitcoin increased by 1%, the transaction volume of Bitcoin would increase by 2.6% on the same day. This relationship also applies in other years, but in 2018 and 2019, the number of tweets increased by 1%, and the increase in Bitcoin transaction volume was less than 1%.
By analyzing the number of tweets to predict the transaction volume of the next day, we found similar results. In 2017, when the number of tweets on that day increased by 1%, the transaction volume of Bitcoin on that day increased by 2.5%, increasing in 2018 It is 0.64%, an increase of 0.72% in 2019.
Can Twitter accurately predict Bitcoin's return?
We want to accurately predict the return on investment in any financial market. We haven't seen any significant results between Twitter and Bitcoin returns over the years. When we tried to establish a relationship between Twitter and future Bitcoin returns, the results we obtained were not significant, so we cannot conclude that Twitter can predict Bitcoin returns.
Analysis of 2020 data
Since the beginning of this year, the price of bitcoin has experienced a sharp increase, which has also allowed cryptocurrency hedge funds to achieve a return of up to 27% in January, the best performance of such funds since 2017. This data is also more consistent with the price trend of altcoins, which is a positive signal. This also leaves room for further research on whether previously observed social media trends are really affecting cryptocurrency trading volumes. We need to reconfirm whether the situation in early 2020 has similar characteristics to the bull market in 2017 or 2019.
Bitcoin daily price from January 1 to February 13, 2020
The average number of tweets referring to Bitcoin in January and February this year has grown from an average of 18,972 tweets per day in 2019 to an average of 22,070 tweets. In addition, in addition to the unusual increase in the number of tweets on February 2 this year, the average number of tweets in February was 31945, an increase from January.
Daily Tweets from January 1, 2020 to February 1, 2020
Based on this trend, we found that in January and February 2020, there was also a certain correlation between the number of tweets referring to Bitcoin and the transaction volume. However, they are less relevant than in other years. When the number of tweets increased by 1%, the volume of Bitcoin transactions on that day increased by 0.423%.
Going forward, investors can incorporate the impact of the number of tweets on the price and volume of transactions into their analysis. Many analysts believe that the cryptocurrency market is already on the verge of a bull market. Observing social media indicators such as Twitter can be an important reference indicator for investors to determine the speculative cycle, so that they can adjust their investment strategies accordingly.