Today I Got a Million, Tomorrow, I Don't Know: On the Predictability of Cryptocurrencies by Means of Google Search Volume

Abstract

We evaluate the usefulness of Google search volume to predict returns and volatility of multiple cryptocurrencies. The analysis is based on a new algorithm which allows to construct mulit-annual, consistent time series of Google search volume indices (SVIs) on various frequencies. As cryptocurrencies are actively traded on a continuous basis and react very fast to new information, we conduct the analysis initially on a daily basis, lifting the data imposed restriction faced by previous research. In line with the literature on financial markets, we find that returns are not predictable while volatility is predictable to some extent. We discuss a number of reasons why the predictive power is poor. One aspect is the observational frequency which is therefore varied. The results of unpredictable cryptocurrency returns holds on higher (hourly) and lower (weekly) frequencies. Volatility, in contrast, is predictable on all frequencies and we document an increasing accuracy of the forecast when the sampling frequency is lowered.

Keywords: Bitcoin, Cryptocurrency, Volatility, Prediction, Google Search Volume

JEL Classification: C22, C43, C53