Amazing Trick To Detect Bitcoin Price Bubbles
In this guest piece, Woo discusses the recent run-up in bitcoin price, and the methods he uses to determine if and when bitcoin is overvalued.
Simply put, Google Trends is a great way to track the growth of active bitcoin users.
The search ‘BTC USD’ serves as a proxy for the engagement of active bitcoin users as they check the daily price. In the chart above, the baseline denotes the exponential growth of active users, while the height above the line illustrates their engagement levels.
When engagement levels run high, bitcoin users are in party mode, checking the price daily of their precious coin. If engagement levels are too high, that’s when we are in a price bubble, and it’s a good time to sell.
Here’s that graph again with the ‘bubble zone’ drawn:
Conversely, when engagement is at a low (marked with green dots), this is a good time to buy. Put together, Google Trends is a pretty reliable buy and sell indicator.
So, what does this say about the recent run-up in price?
Here, we can see bitcoin is not in a bubble, and that there is likely still plenty of room for our current bull run to continue.
This piece is not intended to provide, and should not be taken as, investment advice.
Images via Willy Woo for CoinDesk; Soap bubble via Shutterstock