Thursday, May 24, 2018

New study shows that Bitcoin price direction based more on emotion than on any market fundamentals

It should come as no surprise to those who have questioned whether Bitcoin and the myriad of other cryptocurrencies were more a scheme rather than an innovation when a new study out shows that cryptocurrency prices are driven more by the emotional pull of investors rather than by any real market or asset fundamentals.

Cryptocurrency fever was initially driven by a small fringe of ararcho-capitalists back between 2009 and 2011 before the advent of Bitcoin exchanges began to increase awareness for the virtual currency.  And once the big price escalation came in early 2017, millions of people were drawn into this asset class with little understanding of what cryptocurrencies were, and where their investing decisions were primarily being made under the intoxication of getting rich quick.

The price of bitcoinethereum and other cryptocurrency is determined by the mood of investors rather than any economic indicators, according to a new study. 
Daniele Bianchi, an assistant professor of finance at Warwick Business School, found that the price patterns of the 14 largest cryptocurrencies reflect past returns of investors, combined with the hype and emotion experienced as they watch the value climb or fall.
“There is research showing limited similarities between Bitcoin and gold, but looking across the 14 biggest cryptocurrencies the high volatility of their price means that they can hardly be seen as a reliable savings instrument in the short-term, let alone the long or medium term,” said Dr Bianchi, whose working paper on the subject is titled Cryptocurrencies as an Asset Class: An Empirical Assessment
This behaviour can be attributed to the fact that bitcoin and other cryptocurrencies fall outside the remit of governments or financial institutions. Investing in digital currencies is therefore more similar to buying equity in a high-tech firm rather than a normal currency, the study suggests. 
The volatile price of bitcoin reflects core ideas of the study, having swung between $6,500 and $10,000 just within the last six weeks.  
Dr Bianchi warned that the current cryptocurrency market is akin to the dot-com bubble between 1997 and 2001 that saw excessive speculation in internet firms on the part of investors, eventually resulting in the collapse of many of the companies. – UK Independent
In a conclusion to this study, the problem does not reside in Bitcoin or the cryptocurrencies themselves, which as part currency, part security, and part medium of exchange is simply another asset class that has utility, but not necessarily ready application.  No the problem as always resides with investors, where for the most part it doesn't matter whether it is about stocks, bonds, or real estate, the majority of people who dabble in investing are driven more by emotion than in the painstaking work of researching a particular asset to put in their portfolios. 

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