Bitcoin price crashes linked to web search surges

Chatter about Bitcoins on social media can influence the value of the virtual currency

A spike in searches for Bitcoins can be a good predictor of an imminent crash in its value, suggests research.

The conclusion emerged from a study of the web activity and social media chatter surrounding the virtual currency by Swiss computer scientists.

Their analysis of who was taking part in this activity helped to explain the meteoric rise in the value of bitcoins.

It might also offer insights into how online communities adapt and grow, suggested the research team.

Key variable

Bitcoin was a great candidate for research because so much of the activity surrounding it takes place online, wrote the team in a paper published in the Journal of the Royal Society. Bitcoins are a virtual currency which depend on people using their computers to both generate the cyber coins and to verify transactions carried out with them.

Currently one bitcoin can be exchanged for $585 (£347).

Studying the "digital traces" of this activity could help lay bare the variables that govern the way the virtual currency behaves said the team.

The four key variables that emerged from the analysis were:

• the size of the user base

• the number of searches for information

• the amount of information shared

• price

From this the team at the Federal Institute of Technology in Zurich managed to find two positive feedback loops that steadily influence how much each bitcoin was worth.

The first "reinforcement cycle" involves an increase in the amount of searching for information about bitcoins, which leads to more chatter about the currency and prompts a rise in its value.

"The successive price surges in the Bitcoin economy are largely due to its growing public attention," said the team.

The second feedback loop involves a rise in search volume which makes more people download the software and join in the mining pools that generate coins. This too tends to lead to a rise in the nominal value of Bitcoins.

"Our analysis suggests that the successive waves of growth of the Bitcoin economy were driven by corresponding waves of new users from public circles gradually opening to the currency" wrote the researchers.

In addition, they found found that search spikes were early indicators of an imminent drop in its value but added that this did not act as a good predictor of the biggest falls in the value of bitcoins.