Cryptocurrency traders could have tripled their money by basing their investments on whether the number of posts mentioning a currency on Reddit was greater than the day before.
The trading technique was uncovered by at the University of California, Riverside, and his colleagues, who analysed more than 130 million posts on 122 cryptocurrency forums, known as subreddits, between 1 June 2005 and 31 August 2022. They then tracked the price of 30 cryptocurrencies that were mentioned on the subreddits.
鈥淲e started thinking about looking into the emotional dynamics of these communities and how they correlate with price movements,鈥� says De Cristofaro.
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The researchers discovered a strong correlation for most cryptocurrencies between the level of conversation on Reddit, compared with the previous day, and a subsequent price increase. Similarly, decreases in the volume of posts about a cryptocurrency can foreshadow dropping prices.
They then conducted a retrospective analysis to see what would have happened if someone decided to trade a cryptocurrency based on whether the number of posts rose, finding they could have made three times more than they invested by doing so. Individual cryptocurrencies saw different lags: an increase in chatter preceded changes in the price of bitcoin by 11 days, for instance, and five days for Ethereum.
Tracking the level of posts made about particular cryptocurrencies would involve analysing every post made across crypto-focused subreddits, so it is unlikely to be within the reach of the average investor. There is another reason to shy away from doing it, say the researchers: it is your money at stake, and this past correlation doesn鈥檛 guarantee that the same trends will occur in the future.
鈥淭his probably isn鈥檛 the best trading scenario,鈥� says co-author at Binghamton University in New York. Blackburn says the link is intuitive because of the nature of cryptocurrency investors, who might be more likely to interact on online platforms like Reddit than offline.
arXiv
