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Behavioral Basis Of Cryptocurrencies Markets : Examining Effects Of Public Sentiment, Fear, And Uncertainty On Price Formation

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Abstract

In recent years, cryptocurrencies have emerged as an exciting, innovative, and highly unorthodox asset class, primarily used for investment and trading purposes by globally-distributed investors. Although cryptocurrencies have attracted significant academic attention, there are currently no credible universally-accepted methodologies for determining their prices and returns. This study explores the use of sentiment analysis to model the effects of four different categories of sentiments towards the cryptocurrency markets to predict the direction of price: positivity/negativity (towards the underlying technology, development, and price of each cryptocurrency) and fear, uncertainty, and bullishness/bearishness in the financial markets. Investor sentiment is shown to successfully predict the price direction of cryptocurrencies, indicating that there is a potential for herding and anchoring biases among investors in crypto assets. Moreover, our analysis shows that cryptocurrencies can be used as a hedge against the stock market during times of market uncertainty, though not necessarily during times of investor fear.

Suggested Citation

  • Gurdgiev, Constantin & O'Loughlin, Daniel & CHLEBOWSKI, BARTOSZ, 2019. "Behavioral Basis Of Cryptocurrencies Markets : Examining Effects Of Public Sentiment, Fear, And Uncertainty On Price Formation," Journal of Financial Transformation, Capco Institute, vol. 49, pages 110-121.
    • Handle: RePEc:ris:jofitr:1625
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    Citations

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    Cited by:

    1. Bennett, Donyetta & Mekelburg, Erik & Williams, T.H., 2023. "BeFi meets DeFi: A behavioral finance approach to decentralized finance asset pricing," Research in International Business and Finance, Elsevier, vol. 65(C).
    2. Zhang, Jiahang & Zhang, Chi, 2022. "Do cryptocurrency markets react to issuer sentiments? Evidence from Twitter," Research in International Business and Finance, Elsevier, vol. 61(C).

    More about this item

    Keywords

    behavioral economics; cryptocurrencies; fractal markets hypothesis; bitcoin; sentiment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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