A leading indicator is measurable activity that changes before the price of a cryptocurrency starts to follow a particular pattern or trend.
The weather could be said to be a leading indicator for the agricultural sector. If bad weather knocks out the crops for the season, weather can be used as an indicator for the higher future price of such produce (assuming all things remain equal; demand remains constant while supply is reduced).
Do such leading indicators exist for the cryptocurrency market?
Cryptocurrency (at the moment) is almost purely speculative in nature for many cryptocurrencies. If “interest” in a particular cryptocurrency is equated with Demand, then it stands to reason that global “interest” in a particular cryptocurrency can be related to it’s market price.
The higher the “interest”, the higher the demand, the higher the price of that specific cryptocurrency. Conversely, the opposite should be true — the less “interest” in a specific cryptocurrency, the lower the relative price.
To test this theory, we are going to take a look at the price of specific cryptocurrencies over the last 12 months and compare the “interest” in that cryptocurency using a a tool called Google Trends.
How it Works:
Using Bitcoin as an example, the last 12 month of price history will be taken from Trading View , which looks similar to this:
The Google Trends chart for Bitcoin will also be added, which looks similar to this:
These charts are then combined to see if any patterns emerge.
In the case of Bitcoin the combined two charts would look like this:
The Green Line represents the USD price of Bitcoin while the Blue Line represents Google Trends “Interest” for the search term “Bitcoin”.
Can you See any Patterns?
In the case of Bitcoin (above) there is a very close relationship between the “interest” in the cryptocurrency and it’s price. It could even be said there is a slight lag of a few days between “Interest” and “Price”.
As you will notice, there is a drop in “interest” in Bitcoin even though the price was still rallying higher. Maybe this is just an exception… Are there other examples to support this theory?
Let’s look at a few others:
In the example of Verge, there does seem to be a direct correlation between interest in the coin and it’s price.
Again, we see a very solid relationship between the interest in Digibyte and it’s price.
A relationship can also be seen with KuCoin
The same can be said for IOTA.
There are many other cryptocurrencies where this trend holds true.
Why Does this Work?
Most cryptocurrencies are speculative in nature. The more speculators (investors) searching for the cryptocurrency, the higher the probability of more investment in that cryptocurrency. The higher the demand (interest in the cryptocurrency) the higher the price. And the converse is also true.
However, this approach doesn’t work for all cryptocurrencies. There are many exceptions which don’t fit into this model. One such example is EOS.
Impressively, the interest in EOS is a consistent ~75% interest over the last year. According to our observations above, it would be assumed the price would continue to increase — but the actual price doesn't reflect this.
So why doesn’t EOS follow this trend?
One likely reason is EOS is not seen by investors necessarily as a speculative investment — It’s a blockchain development platform for the development of dapps where it’s value is determined by the apps built on-top of it.
Or, maybe this is a lagging indicator illustrating that EOS is undervalued and supporting future price growth. For the case of EOS, this will be an interesting outlier to follow in the upcoming months.
Many cryptocurrencies which are highly speculative in nature have a tendency to follow the pattern described above.
Even though this correlation doesn’t apply to all cryptocurrencies it does offer insight and a simple and easy assessment tool for investors when determining the probability for future price movements within the cryptocurrency space; both for individual cryptocurrencies and for the market as a whole.
Do you agree with this analysis? — Let me know your comments below.
Interested in learning more?
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