Fundamental Sentiment and Cryptocurrency Risk Premia

85 Pages Posted: 11 Apr 2023 Last revised: 5 Sep 2023

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

My T. Nguyen

Washington University in St Louis, John M. Olin Business School

Ganesh Viswanath-Natraj

Warwick Business School

Date Written: March 27, 2023

Abstract

This paper investigates the cross-sectional predictive ability of text-based factors in the cryptocurrency market, an important asset class for retail and institutional investors. We employ Bidirectional Encoder Representations from Transformers (BERT) topic modeling to analyze news articles discussing the top 43 cryptocurrencies by market capitalization. We build text-based factors related to cryptocurrency fundamentals and find that the exposure to sentiment on fundamentals is priced. Cryptocurrencies that have a high beta with respect to our measure of fundamental sentiment are typically platform and general payment tokens, whereas low beta currencies are governance tokens. Currency betas correlate with measures of value on the blockchain, such as the ratio of the network of users and transactions to market cap. High beta currencies are more sensitive to fundamental news and earn a risk premium. Our results demonstrate the importance of considering text-based factors when analyzing cryptocurrency returns.

Keywords: cryptocurrency, fundamentals, media coverage, textual analysis

JEL Classification: G11, G12, G14, G32

Suggested Citation

Filippou, Ilias and T. Nguyen, My and Viswanath-Natraj, Ganesh, Fundamental Sentiment and Cryptocurrency Risk Premia (March 27, 2023). Available at SSRN: https://ssrn.com/abstract=4402365 or http://dx.doi.org/10.2139/ssrn.4402365

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

My T. Nguyen (Contact Author)

Washington University in St Louis, John M. Olin Business School ( email )

Room 274 Simon Hall
Washington University in St. Louis
St. Louis, MO 63130
United States
6188183228 (Phone)

Ganesh Viswanath-Natraj

Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
CV4 7AL (Fax)

HOME PAGE: http://https://ganeshvnatraj.netlify.com

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