The "news sentiment" appears to have less impact on crypto returns compared to the "social media sentiment."
The Pennsylvania State University researchers have recently discovered that social media discussions hold significant sway over cryptocurrency returns, defying norms observed in other financial markets.
The findings were part of research looking into "the impact of market sentiment on cryptocurrency returns."
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Based on the comprehensive research paper, it was revealed that social media has a substantial impact on cryptocurrency adoption and activity rates. On the other hand, the predictive value of cryptocurrency journalism for market movements appeared to be rather low.
Our findings indicate that social media sentiment significantly predicts crypto returns, while sentiment from news media does not.
To extract these findings, the research team employed natural language processing to examine financial news articles alongside social media comments. Sentiment scores were generated across 53 topics, and attention metrics were established for over 300 cryptocurrencies.
Subsequently, the researchers compared these sentiment scores and metrics with real-world cryptocurrency returns from the same period. The comparison unveiled some intriguing insights about the correlation between public sentiment and cryptocurrency market performance.
The Pennsylvania State University researchers found that there is a disconnect between social media sentiment and the risk premium channel as predictors of cryptocurrency returns. The risk premium channel, a viewpoint through which investors gauge their investments, is closely tied to market volatility and the inherent risk associated with a particular asset.
The researchers hypothesize that this unusual dynamic could be due to the presence of numerous consumer investors on cryptocurrency social platforms, many of whom hold sizable cryptocurrency portfolios. Given these compelling findings, they recommend further investigation into the relationship between social media sentiment and the returns of cryptocurrency investments.
The study underlines the unconventional dynamics of the cryptocurrency market, emphasizing the role social media sentiment plays in shaping the financial outcomes in this emerging financial landscape.
