Just as a disclosure to all, I’m not a proponent of making an investment out of digital currency as things like Bitcoins are very risky and volatile. Maybe someday I’ll look back and kick myself for not buying a few or mining them but nonetheless, it is not my cup of tea.

I was pondering whether a relationship existed between the number of searches for the term bitcoin and the USD/BTC conversion rate (or the number of US dollars per Bitcoin rate). There are a few reasons that I believe Google Trends would make a very powerful tool in identifying key movements in the exchange rate for the digital currency:

  1. Aside from a few ATMs scattered across the world, the majority of Bitcoin exchanges take place over the web.
  2. There is a lack of general understanding of where to access bitcoin exchanges and more so, which is the best in terms of safety. This forces individuals to resort to a scattershot approach using a search engine and relying on the results that come from that search.
  3. Few retailers widely accept bitcoins, and if they do, it is done for a limited timeframe(Surprisingly, Sears will accept the currency during this Black Friday); this again pushes users to search engines to better identify eligible retailers that would accept Bitcoin as a form of payment.

All this to say is that most Bitcoin activity is done over the web, and for the most part, search engines are needed in the process of identifying exchanges and retailers that will accept the digital currency. So when there is an influx of individuals looking to make exchanges or identify retailers whom accept the currency, there should be a corresponding increase in the volume of searches for the term Bitcoin.

Surprisingly, the relationship between the search volume spikes and the increase in the conversion rate of USD to Bitcoin was very closely related. For instance there were two significant search spikes for the term: March – April 2013 and October – November 2013. When compared to the conversion rate of USD/BTC, we see a corresponding significant appreciation in the rate. See the google trends chart and conversion rate during the March – April 2013 increase:

GoogleTrends_Bitcoin
GoogleTrends_Bitcoin
USD/BTC Spot Rate Chart
USD/BTC Spot Rate Chart

 

So, it looks like we have ourselves a crystal ball for Bitcoins!! Well not exactly. Using google trends seems to be very accurate in determining when a spike in the USD/BTC rate will take place, but one thing it will not tell you is when that rate will come crashing down. Logic would tell you that when search volume for Bitcoin decreases, so to should the conversion rate. It is not as simple as this, many times, the search volume trend may still signal an increase in the rate, but the rate itself may start to correct in a very significant way turning Bitcoins into “kick you in the Butcoins”.(Sorry, I just had to)

Considering the very essence of this blog is to identify potential investments using google trends, I figure I at least comment on Bitcoins considering how popular they have become, and how very closely correlated the spikes and the increase in the USD/BTC rate is. Just to make it clear, I would not condone investing in Bitcoin or its currency as it is very very risky!

Trendvesting.

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