A recent study conducted by researchers at Pennsylvania State University delved into the relationship between social media, attitudes, emotions, and the cryptocurrency market. The findings of their analysis may challenge conventional wisdom regarding similar trends in other financial markets.
The research paper highlighted the significant role that social media platforms play in cryptocurrency adoption and activity rates. Surprisingly, the study found that sentiment expressed on social media platforms was a strong predictor of crypto returns, whereas sentiment derived from news media did not have the same impact.
“Our findings indicate that social media sentiment significantly predicts crypto returns, while sentiment from news media does not.”
To arrive at their conclusions, the researchers employed natural language processing techniques to analyze vast amounts of financial news articles and social media comments. Through sentiment analysis, they generated scores related to 53 different topics and attention metrics for more than 300 cryptocurrencies. By comparing these sentiment scores with actual market returns over a specific period, they were able to assess their predictive value.
One particularly intriguing finding of the study was that while social media sentiment accurately predicted crypto returns, the risk premium channel did not. The risk premium channel refers to the lens through which consumers make investment decisions and is closely tied to market and asset volatility. Typically, higher volatility in traditional markets leads to increased risk aversion and decreased consumer sentiment. However, the study revealed that cryptocurrency displayed a different pattern. Despite being considered a highly volatile asset, the researchers found that market exuberance positively influenced momentum without significantly affecting volatility.
The paper posits that sentiment impacts crypto returns primarily through price perception and demand shocks, rather than through the traditional risk premium channel. The researchers suggested that the unique characteristics of the cryptocurrency market, such as the presence of numerous consumer investors with substantial cryptocurrency portfolios actively engaged on social media, could explain this phenomenon. They also emphasized the need for further investigation into the relationship between social media sentiment and crypto returns to gain deeper insights.
