Does Sentiment Impact Cryptocurrency?

Abstract

This study examines the impact of investor sentiment on cryptocurrency returns. We use a direct survey-based measure that captures the investors’ sentiment on Bitcoins. This direct measure of Bitcoin investor sentiment is obtained from the Sentix database. The results of the study found that the Bitcoin prices experience appreciation when investors are optimistic about Bitcoin. Bitcoin sentiment has significant power in predicting the Bitcoin prices after controlling for the relevant factors. There is also evidence that the sentiment of the dominant cryptocurrency, i.e., Bitcoin, influences the price of other cryptocurrencies. Further, we extend our analysis by investigating the impact of equity market sentiment on cryptocurrency returns. We proxy equity market sentiment using two measures viz: Baker-Wurgler sentiment Index and the VIX Index. When the equity market investors’ sentiment is bearish, cryptocurrency prices rise, indicating that cryptocurrency can act as an alternative avenue for investment. Our results remain unaffected after controlling for potential factors that could impact cryptocurrency prices.

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