A research paper from Southern Methodist University suggests that the volume of tweets and Google Search Volume Index (SVI) were found to be leading price indicators for Bitcoin (BTC) and Ethereum (ETH).
The researchers hypothesis was that the number of tweets and their sentiment (positive and negative) can influence prices, and the study showed that the number of tweets and Google searches changes first before prices do.
It also suggested that sentiment is not as important as the volume of tweets. It says: “Quickly understanding the impact of tweets on price direction can provide a pur- chasing and selling advantage to a cryptocurrency user or a trader. By analyzing tweets, we found that tweet volume, rather than tweet senti- ment (which is invariably overall positive regardless of price direction), is a predictor of price direction“.
Previously, ‘sentiment’ was considered very important. The theory of sentiment analysis is a branch of technical analysis that states that price discounts everything, and that price trends are ultimately a reflection of crowd psychology. Following this theory would lead you to measure how positive or negative the people’s shared views are towards a particular stock or cryptocurrency, and as a result you could estimate its price trajectory. However, as Bitcoinist points out, “The lack of sentiment being the leading factor was theorized due to the amount of “noise” there is on Twitter about the currencies compared to actual conversation.”
For example, the researchers found that there 21 million bots on Twitter posting mostly factual information about cryptocurrency prices, adverts and spam messaging. These are not humans having real discussions about how they feel about either Bitcoin or Ethereum.
But the paper did have something else interesting to say about this. They found “People who tweet about cryptocurrencies even when their prices drop have an interest in them beyond investment opportunity making the tweets biased towards positive.”