Cryptocurrencies are Not Immune to Coronavirus: Evidence from Investor Fear

Abstract

This paper examines the effects of fear of coronavirus on returns and volatility of five major cryptocurrencies during the COVID-19 outbreak. Adopting Google search volume on a comprehensive list of coronavirus-related terms to construct a gauge of fear, we show that daily innovations in coronavirus fear are associated with negative returns and positive volatility. The effects are driven by the extreme events and associated googling in March 2020. Out of-sample tests further show a significant contribution of fear to forecasting next-day volatility. The results indicate that (i) cryptocurrencies (particularly bitcoin) are not a safe haven for investors against the COVID-19 pandemic, and (ii) Google searches contain important information to explain cryptocurrency market movements during times of crisis.

Keywords: cryptocurrencies, bitcoin, coronavirus, pandemic, Google Trends

JEL Classification: G01, G17, G23