An Anatomy of Cryptocurrency Sentiment
46 Pages Posted: 10 Jul 2023
Date Written: June 15, 2023
In this paper, we investigate the impact of market sentiment on cryptocurrency returns. To accomplish this, we use a novel dataset that captures a multitude of attitudes, moods, and emotions extracted from a vast amount of news and social media content. Our findings indicate that social media sentiment significantly predicts crypto returns, while sentiment from news media does not. Additionally, we observe that fundamental events play a role in shaping sentiment, but market exuberance---sentiment unrelated to fundamental events---is a strong and robust predictor of returns. Furthermore, we find that market exuberance is positively related to momentum return but does not positively predict volatility. This suggests that sentiment influences returns through price perception and demand shocks rather than the risk premium channel. Overall, our research highlights the importance of sentiment in understanding and predicting cryptocurrency market dynamics.
Keywords: cryptocurrencies, sentiment, return, volatility, social media, market exuberance
JEL Classification: C51, C52, C58, G01, G10, G12
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