Can social data be used to predict the value of digital currencies such as Bitcoin?

Nobody gets me Bitcoins!

Nobody gets me Bitcoins! (Photo credit: zcopley)

In the current economic climate, many people have been looking into alternative investment opportunities, or safe places to put their money outside of the banking system. Options such as precious gems, or fine wine, are regularly discussed. One of the rising stars in this space is the Bitcoin market.

Bitcoins are a decentralised digital currency which uses open source technology to trade coins between users all over the world. Bitcoins are obtained by completing increasingly difficult mathematical calculations, this system ensuring only that a limited number of Bitcoins are available and that no one organisation controls the flow of coins.

Using social data to predict consumer behaviour, or even the value of goods, is nothing new, and many traders have been looking to include social metrics into their trading algorithms. Various academic studies have also highlighted predictive qualities of social data in the equity markets. However, because there are so many factors involved in pricing most financial instruments, it can be extremely difficult to accurately predict how markets will change.

Bitcoin however has several characteristics which make it an ideal market for social data prediction:

  • The value of Bitcoins is determined almost solely on market demand, because the number of coins on the market is predictable and are not tied to any physical goods
  • Bitcoin traders tend to be in the same demographic as social media users, and so their attitudes, opinions and sentiment towards Bitcoin are well documented
  • Bitcoin is predominately traded by individuals rather than large institutions
  • Events that affect Bitcoin value are disseminated first and foremost on social media

We intend to test the hypothesis that Bitcoins could prove an exciting testbed for social prediction, and give us a greater understanding of how publicly expressed sentiment and behaviour actually impacts the value of a commodity.

What do you think? Can social data be used to predict Bitcoin values?