Penn State researchers recently analyzed Do attitudes and sentiment around cryptocurrencies help predict returns. Their findings may contrast sharply with related financial markets.
According to the team’s research paper, social media plays a huge role in rates of adoption and activity, while cryptocurrency news is not a good predictor of market movements:
“Our findings show that social media sentiment significantly predicts cryptocurrency returns, whereas news media sentiment does not.”
The researchers analyzed millions of financial news articles and social media comments using natural language processing and generated sentiment scores for 53 topics and attention indicators for more than 300 cryptocurrencies.
They then compared real returns over a given period of time to concurrent news and social media sentiment.
Perhaps the most interesting of their findings is their conclusion: while social media sentiment is a good predictor of cryptocurrency returns, the risk premium channel is not.
The risk premium channel is a lens through which consumers make investment decisions. It is directly related to market and asset volatility.
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Cryptocurrencies are often viewed as a highly volatile asset. In a typical market, this volatility often results in higher risk premiums and lower adoption and activity.
Taking the real estate market as an example, the study programme Potential buyers tend to be risk-averse as market volatility increases and consumer confidence falls.
Research by the Penn State team shows that this is not the case with cryptocurrencies. Market exuberance is positively correlated with momentum but “does not positively predict volatility,” the team wrote in its conclusion.
The paper continues: “This suggests that sentiment influences returns through price perception and demand shocks rather than risk premia channels.”
The researchers ultimately concluded that this may be due to the large number of consumer investors with large cryptocurrency portfolios being active in the crypto social space. They also recommend further research on the relationship between social media sentiment and cryptocurrency returns.
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