SOCIAL MEDIA SENTIMENT AND ITS EFFECTS ON CRYPTOCURRENCY PRICE VOLATILITY

Year 2024, Volume: 20 Issue: 1, 1 - 4, 31.12.2024

Ozge Arabaci Urgenc Oktay Tas

Abstract

Purpose- Following its introduction in 2008, cryptocurrencies have attracted great deal of attention from the investors. Cryptocurrency market have grown rapidly in terms of transaction volumes and number of investors involved with the launch of different kinds of alternative coins (altcoins). Cryptocurrency markets show some differences from the stock market with less institutional investor involvement. With the high proportion of retail investors in the market, we assume sentiment would be one of the leading forces that can accelerate cryptocurrency price movements in both directions that leads to higher volatilities. In this study, we try to shed a light on social media sentiment and its effect on cryptocurrency price volatility for 9 different cryptocurrencies, namely Bitcoin, Ethereum, Ripple, Binance Coin, Dogecoin, Solana, Cardano, Litecoin, Avax.
Methodology- The study uses Google search volume index and number of tweets weekly collected from Twitter between the dates January 2020 to March 2023 as investor attention measures to attract social media sentiment in addition to economic policy uncertainty index (EPU), CBOE S&P 500 implied volatility index (VIX) and macro and micro indexes constituted by using the Google search volume indexes for micro and macro fears and taking the weekly sum of those indexes. We investigated investor attention measures and mentioned indexes’ impact on cryptocurrency volatility by using seemingly unrelated regression.
Findings- The analysis reveals that google search volume index has a significant positive impact on volatility of cryptocurrencies in addition to economic policy uncertainty index and micro pessimism measures. Number of tweets data has no significant impact on volatility in contrast to Google search volume index.
Conclusion- Based upon the analysis, it may be concluded that google search volume index has better captured investor attention and might give an insight regarding cryptocurrency volatilities where number of tweets collected from Twitter has no significant impact on volatilities.

Keywords

Cryptocurrency, investor attention, social media sentiment, Google Search Volume Index, Uncertainty Index

References

• Akyildirim, E., Corbet, S., Lucey, B., Sensoy, A., & Yarovaya, L. (2020). Forecasting cryptocurrencies financial time series: The importance of considering the price dependence of blockchain-related news events. International Review of Financial Analysis, 71, 101506. https://doi.org/10.1016/j.irfa.2020.101506
• Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
• Balcilar, M., Bouri, E., Gupta, R., & Roubaud, D. (2017). Can volume predict Bitcoin returns and volatility? A quantiles-based approach. Economic Modelling, 64, 74-81. https://doi.org/10.1016/j.econmod.2017.03.019
• Białkowski, J. (2020). Sentiment-based trading in cryptocurrency markets. Journal of International Financial Markets, Institutions & Money, 65, 101610. https://doi.org/10.1016/j.intfin.2020.101610
• Bouri, E., Gupta, R., Tiwari, A. K., & Roubaud, D. (2017). Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions. Finance Research Letters, 23, 87-95. https://doi.org/10.1016/j.frl.2017.02.009
• Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier? Finance Research Letters, 20, 192-198. https://doi.org/10.1016/j.frl.2016.09.025
• Burggraf, T., Rudolf, M., & Wagner, S. (2020). Economic policy uncertainty and cryptocurrency volatility. Journal of Economic Behavior & Organization, 179, 114-142. https://doi.org/10.1016/j.jebo.2020.08.027
• Chen, Y., & Zhang, Z. (2021). Market sentiment, investor attention and cryptocurrency price movements. Finance Research Letters, 41, 101806. https://doi.org/10.1016/j.frl.2020.101806
• Cheng, J. W., & Yen, C. L. (2020). Economic policy uncertainty and cryptocurrency volatility. International Review of Economics & Finance, 69, 748-764. https://doi.org/10.1016/j.iref.2020.06.018
• Demir, E., Gozgor, G., Lau, C. K. M., & Vigne, S. A. (2018). Does economic policy uncertainty predict the Bitcoin returns? An empirical investigation. Finance Research Letters, 26, 145-149. https://doi.org/10.1016/j.frl.2018.01.005
• Dyhrberg, A. H., & Duffy, D. (2018). The impact of investor attention on the price dynamics of Bitcoin. Journal of Risk and Financial Management, 11(4), 56. https://doi.org/10.3390/jrfm11040056
• Jiang, Y., & Li, C. (2021). Investor attention and cryptocurrency market behavior: Evidence from Google Search Volume. International Review of Financial Analysis, 77, 101859. https://doi.org/10.1016/j.irfa.2021.101859
• Klein, T., Thu, H. P., & Walther, T. (2018). Bitcoin is not the New Gold–A comparison of volatility, correlation, and portfolio performance. International Review of Financial Analysis, 59, 105-116. https://doi.org/10.1016/j.irfa.2018.07.010
• Kristoufek, L. (2018). The role of Google Search Volume in predicting cryptocurrency prices. Finance Research Letters, 29, 82–85. https://doi.org/10.1016/j.frl.2018.04.001
• Mai, F., Shan, Z., Bai, Q., Wang, X., & Chiang, R. H. L. (2018). How does social media impact Bitcoin value? A test of the Silent Majority Hypothesis. Journal of Management Information Systems, 35(1), 19-52. https://doi.org/10.1080/07421222.2018.1440774
• Shen, D., Urquhart, A., & Wang, P. (2019). Does Twitter predict Bitcoin? Economics Letters, 174, 118-122. https://doi.org/10.1016/j.econlet.2018.10.023
• Smales, L. A. (2019). Bitcoin as a safe haven: Is it even worth considering? Finance Research Letters, 30, 385-393. https://doi.org/10.1016/j.frl.2018.11.002
• Smales, L. A. (2019). Investor attention and global market returns during the COVID-19 crisis. Applied Economics Letters, 27(10), 795-801. https://doi.org/10.1080/13504851.2020.1732887
• Yousaf, I., & Bukhari, S. (2020). Investor sentiment and the volatility of Bitcoin: A study based on Google Trends. Journal of Behavioral and Experimental Finance, 27, 100324. https://doi.org/10.1016/j.jbef.2020.100324