[dawilster]

I was thinking of something very similar the other day but in regards to bitcoins. They are very volatile at this stage and whenever they're in the public eye they either seem to increase or decrease in value. Perhaps somebody could perform a study as to a relation between the volume of bitcoin related search terms and it's market value.

[jvanderwal]

I'm actually looking into this a little right now since I happen to work for a media monitoring company. I can tell you there is a definite correlation between them, but haven't been able to determine if it's a leading or lagging indicator.

[chromaton]

I'm not sure this is so great. For example, the number of searches for Bitcoin is predicted very well by the number of searches for "marina fresh beat band".

http://www.google.com/trends/correlate/search?e=bitcoin&...

[hammock]

As soon as someone figures out bitcoin derivatives (e.g. options), you'll be able to buy or sell the volatility. More broadly, such a development may also stabilize those price fluctuations.

[someben]

What is your source for the ole' "derivatives reduce volatility in the spot market" assumption?

[fennecfoxen]

Theory. If you expect that the price of bitcoins is going to be somewhere in the next month, but it's wildly deviated from that on the spot market, there is a monetary incentive to buy/sell bitcoin until the prices are in line with long-term expectations -- discounted for risk, of course. Derivatives like futures options reduce that risk, because you can lock in that future price right now. If anyone's offering, that is.

Derivatives could also reduce risk for users. For instance: you're a business that accepts bitcoins for payment. But the price of bitcoins can fall by 50% in a day! So you'd better transfer those bitcoins to cash the moment you get them, or you're subject to losing half your cash any day. Something that's too hot to handle like that kind of damages the ability to use it as a medium of exchange, doesn't it? But you could alternatively buy bitcoin currency futures, essentially locking in your current price. So maybe you could hang onto those bitcoins a while and use them to pay people for your referral program or something. (Oh, sure, there's a cost associated with it, but there are costs associated with translating cash back and forth as well. Depending on the price of the derivatives, it might make sense.)

[someben]

When people use derivatives to hedge their exposure to "bad things happening" and the market is not very liquid (i.e. BTC), arbitrage opportunities can persist. For example, if there is no buyer at an out-of-the-money option strike price I know is overpriced, then the market cannot correct itself even though I am "right." When these mis-pricings stick around for a while, the eventual corrections are often much more extreme. Derivatives reduce overall volatility when the spot market is mature and liquid, which is a far cry from MtGox right now.

[foobarqux]

What do you mean by "figure out"? Options (mpoe) and futures (icbit) exist in some form.