Timing the “Bitcoin Bubble” — How Google Trends offers insight into the $100 billion question Travis R Follow Oct 24, 2017 · Unlisted

Finding an effective leading indicator in crypto is certainly not easy. Many enthusiasts are far too early calling “the top” of Bitcoin’s rallies and they pay a severe price in lost gains — we all remember Vinny Lingham calling a top at $1250 only for BTC to run upwards 400% since.

Surely cryptoassets are not immune from human irrational exuberance. After all, the price is ultimately determined by human behaviour. So then, what indicators do we have at our disposal to identify when people are too excited? How can we differentiate between bubble tops and short-lived price corrections? Google Trends is arguably the best publicly available data we have to analyse these questions.

Willy Woo articulated in a post in March that the search term “BTC USD” works as a useful proxy for the engagement of active Bitcoin users because the more engaged users are, the more frequently they check the daily price. Let’s assume that the number of search terms for “BTC USD” also serves as a proxy for excitement levels.

The above chart on it’s own is not very useful. We want to observe deviations of the engagement levels from the natural growth rate in users. Now let’s assume that Woo’s Law (Bitcoin users will double every 12 months), holds true. We can plot “BTC USD” Google searches on a logarithmic scale and compare against the straight-line exponential growth in users.

Willy Woo first showed the usefulness of this analysis in his March post. Given the price data that has emerged since March, I argue that his proposal of the “bubble zone” was too conservative and I offer an alternative interpretation. Lets overlay the Bitcoin price (also plotted on a logarithmic scale) on top of the Google search data.

In this analysis, I define the bubble zone to be above the top red line—a range where people are far too excited about the price relative to the natural user growth. It follows that the two peaks in 2013 are bubbles. Both were followed by 70%+ price reductions. Think of the bubble-zone as the “euphoria” part of the well-known market cycle.

Critically, user engagement is a scale. The zone of irrational exuberance represents the region where users are overly excited relative to the natural user growth, but importantly, it’s not in the bubble zone. Since 2016, engagement levels have hit the irrational exuberance zone 4 times. Each occasion has been followed by a 25%+ price reduction in a short time frame. However, Bitcoin has rebounded from these short-term price falls almost as fast as they occurred and maintained a long-term bull run.

What does this say about where we are now?

Perhaps it is unlikely that Bitcoin’s price will truly reach the “top” until we enter the bubble zone again. If the past is anything to go by, a 70% price reduction isn’t off the cards if we reach that zone. Until then, it is unwise for anyone to call the “top” when we’re only in the zone of irrational exuberance.

Conclusion

To external observers who aren’t familiar with crypto, Bitcoin’s price rally screams a conventional bubble at the moment. Many comment this, but very few use data to support their hypothesis. We must factor in the incredibly high natural growth rate of engaged users when making such bold claims. Google’s search data provides important insight for when we might actually be in bubble territory.