lundi 6 avril 2015
Bitcoin and Market Crashes
Posted on 13:34 by nice news
Predicting big market crashes is a difficult business, many would say impossible. If enough investors believe a cataclysm is coming, their selling will simply make it happen sooner -- a dynamic that would quickly render any convincing forecasting method obsolete.
Nonetheless, a pair of physicists -- drawing inspiration from the market for bitcoin, no less -- might be on to something.
Jonathan Donier and Jean-Philippe Bouchaud, both of whom work at Paris-based hedge fund Capital Fund Management, started from an obvious idea: It would be easy to foresee big crashes if you could monitor the actual thoughts and expectations of all investors. With that kind of superhuman knowledge, you could get an early warning of emerging imbalances between pessimists and optimists, between likely sellers and buyers. Such imbalances set the groundwork for a crash -- specifically, when the number of potential buyers gets very small.
Of course, no one has access to such mental information. Yet Donier and Bouchaud found a clever way to estimate it, and to do so using only publicly available data.
They turned to the bitcoin market because it has a unique feature, perhaps related to the fact that it is still fairly young and exotic: Traders place their buy and sell orders early and leave them there for all to see. Of course, the picture is constantly changing as price movements prompt traders to enter new orders. Still, the orders visible at any moment already make it possible to predict crashes.
In a recent paper, Donier and Bouchaud found that the market is prone to crash specifically when buy orders are scarce, and estimated how much a typical-size sell order should move the price when matched with such buy orders. Using this method, they were able to predict the size of the biggest 14 single-day drops in bitcoin value between January and April 2013 to a high degree of accuracy.
Nonetheless, a pair of physicists -- drawing inspiration from the market for bitcoin, no less -- might be on to something.
Jonathan Donier and Jean-Philippe Bouchaud, both of whom work at Paris-based hedge fund Capital Fund Management, started from an obvious idea: It would be easy to foresee big crashes if you could monitor the actual thoughts and expectations of all investors. With that kind of superhuman knowledge, you could get an early warning of emerging imbalances between pessimists and optimists, between likely sellers and buyers. Such imbalances set the groundwork for a crash -- specifically, when the number of potential buyers gets very small.
Of course, no one has access to such mental information. Yet Donier and Bouchaud found a clever way to estimate it, and to do so using only publicly available data.
They turned to the bitcoin market because it has a unique feature, perhaps related to the fact that it is still fairly young and exotic: Traders place their buy and sell orders early and leave them there for all to see. Of course, the picture is constantly changing as price movements prompt traders to enter new orders. Still, the orders visible at any moment already make it possible to predict crashes.
In a recent paper, Donier and Bouchaud found that the market is prone to crash specifically when buy orders are scarce, and estimated how much a typical-size sell order should move the price when matched with such buy orders. Using this method, they were able to predict the size of the biggest 14 single-day drops in bitcoin value between January and April 2013 to a high degree of accuracy.
Bitcoin and Market Crashes
Categories: Bitcoin and Market Crashes
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