How to recognize the difference between natural grow and speculation of a currency using Google Trends
Google Trends is a tool from Google (obviously, I know) which determines how much a word or a pair of words are searched on the internet. It can be used to find out how popular a concept is, which could be anything, but what is interesting to many is cryptocurrencies. Google Trends have been used from the beginning by traders to improve estimates on which products are going to succeed and which are going fail on the market. An example of a Google Trends being used this way can be found on this article.
By estimating the popularity of a currency, you can conclude if it is really used, and how much of it's value is determined by the number of actual users instead of some guys speculating its price. When a currency becomes used, it grows usually slow at the beginning and then, by the time the number of traders increases, its price increases too. But when some smart guys (some of us will call them whales) are playing with the price of a currency, you may not see a change in its popularity, but a huge (and fast) change in its price. For the holders this is case where you may not feel comfortable investing, but for the other types of traders, it may be exciting to feel that rush :)
A simple correlation Price - Popularity
As a subject for this case study I will use Bitcoin, because it is the most popular cryptocurrency right now, which makes it suitable.
Above I have added the diagrams for the price of the Bitcoin, and its popularity over the past 12 months. As you can see there is a correlation between them, not a perfect one, but they are pretty relevant one to each other. Now I am going to show you the same graphics but for the last three months, in order to see what actually happened when China banned Bitcoin.
As you all know, when Bitcoin was banned, it's price dropped with more than 1000$ in a few days, but not so much people were aware of the secondary effect of the Bitcoin's ban:
The advertise!
When China Banned Bitcoin, this was a very popular part news at that time. Bitcoin gained a lot of popularity, as a giant country has just banned it. So, for many people who haven't heard many about Bitcoin, and the crypto world, that was a remarkable moment. If China banned it, it must be important!
And so it was, as we could have seen, sort after that it raised again at its old level, then surpassed it reaching more than 5k.
This is not the only case when negative news about Bitcoin brought more popularity to the currency. As many of you know, Jamie Dimon has made some declarations about Bitcoin not being valuable, but as he talked about it, its price continued to grow. Again, he was one of the bad guys doing good things by mistake. His talk gained attention of the people around the cryptocurrency which increased in value.
A complete different case
I am going to give you an example of what I think it is an artificial growth, and in this case I am going to focus on Vertcoin. In the crypto world, Vertcoin is pretty popular because it had a great increase (more than 4 times its price) in the last month.
From the graphics above one can simply conclude that Vertcoin is not so popular, instead it has a great increase in price. More, from the popularity graph, it is clear that it is not so used, it received a little attention because of it's increase, but it's price have chances to fall, as it's not sustained so much by a great number of users. It is most likely that it's increase in value was due to some whales playing with it, but it is most likely that after they will be out of the game, it's value will fast decrease.
I hope you will give a try to Google Trends, it is very cool to play with it, you can learn a lot of stuff using it, and it may be very useful when you are trying to make market predictions. Also I hope that you have found this article useful and that you have liked it. Hear you next time, and take care investing your money!