Does Dispersed Sentiment Drive Returns, Turnover, and Volatility for Bitcoin?

42 Pages Posted: 13 Sep 2021

Date Written: September 10, 2021

Abstract

We test the theoretical predictions of the differences-of-opinion literature by analyzing the extensive online discussion on Bitcoin to build a time-varying sentiment distribution, defining disagreement as dispersion in sentiment. High disagreement is associated with negative returns, high turnover growth, and high volatility, confirming the theory's predictions. However, we do not find that an increase in disagreement increases the price, which is seemingly at odds with the theoretical prediction of disagreement leading to overpricing. As the theory predicts, the disagreement effect weakens significantly after shorting instruments were introduced at the end of 2017. Our results are economically significant: at the monthly frequency, a one standard deviation increase in disagreement leads to a 9.2 percentage points lower cumulative return over the following eight months, and the adjusted R2 of regressing contemporaneous returns on average sentiment and disagreement is 0.33.

Keywords: Speculative Bubble, Disagreement, Bitcoin, Sentiment Analysis, VADER

JEL Classification: C22, D84, E42, G12, G41

Suggested Citation

Kantorovitch, Ilja and Heineken, Janko, Does Dispersed Sentiment Drive Returns, Turnover, and Volatility for Bitcoin? (September 10, 2021). Available at SSRN: https://ssrn.com/abstract=3920987 or http://dx.doi.org/10.2139/ssrn.3920987

Ilja Kantorovitch (Contact Author)

EPFL ( email )

EPFL CFI SFI.LL
Station 5 Odyssea Building
CH-1015 Lausanne, Vaud CH-1015
Switzerland

HOME PAGE: http://www.kantorovitch.eu

Janko Heineken

University of Bonn ( email )

Bonn
Germany

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