Introduction and need for research
The young crypto market accommodates more than 250,000 transactions every day but is still considered immature. Its controversy has raised investor sentiment and gained rapid popularity in news and social media. Behavioural finance has widely explored the role of psychological states for other assets, but not yet in the crypto market. Thus, public sentiment has also received attention on the academic stage. This work outlines the most relevant findings in the yet fragmented field of research on emotions in crypto trading. I present the current literature body in a structured framework and identify the knowledge gaps. Furthermore, I suggest a survey study design to fill in some of the research gaps identified in the current state of the art. The residual knowledge gaps are pointed as avenues for future research.
By researching the emotions in crypto exchange, I contribute to the process of “maturing” of crypto assets and aid not only to the scientific advancements, but also the crypto market participants. Investors as the main players in the crypto-market arena will make fewer investment mistakes by being more aware of their emotional states and their impacts in the market. The findings are also relevant to firms that consider to or already use crypto, as well as institutions and policy makers, which govern regulations and design coping mechanisms for crypto adaption.
Definitions
Crypto - also referring to cryptocurrencies or crypto assets or digital assets - are all types blockchain applications of digital wallets, smart contracts and Initial Coin Offerings (ICOs) (Kher et al., 2021).
Emotions - psychological states which influence financial decision making. Even though cognitive and affective sides are complementary in behavioural finance (Ackert & Deaves, 2010).
Scope
On the one hand, the current state of the art of the yet fragment field of emotions in crypto trading is presented in a more structured framework. The findings enfold the changes of the dependent crypto trading variables: price, return, volatility, trading volume and value. On the other hand, to address some of the identified research gaps, I suggest a survey study design in collaboration with a crypto trading app. It shifts the focus to the psychological emotional states as independent variables and how they shape the crypto-trading decisions and thereby scrutinises the relationship between specific emotions and crypto on a more granulated level.
State of the art and avenues for future research
From recent research we know that public sentiment is a significant predictor of the trading variables in the short term. Price, return and trading volume have a bi-directional positive relationship with sentiment. The tone in news tends to be positive, which explains the crypto appreciation over time. But while authors talk mostly about overall positive and negative emotional states, conclusions about specific emotions are ambiguous. Study 2 suggests a structured framework to fill in some of the knowledge gaps identified in Study 1.
However, some areas remain unexplored. Despite the momentous emotional states on other variables, the implications on the value perception are only briefly touched. Consequently, the reputation of crypto and its long-term development are hard to be determined. Moreover, there is yet no meta-analytical study to provide more robust results and contribute to the four literature reviews in top journals and the current one.
Practical implications
avoid mistakes due to emotions and optimise portfolio strategy.
issue ICOs instead of equity to signal firm value.
(e.g. governments and banks) design adoption mechanisms.
Key References
Anamika, Chakraborty, M., & Subramaniam, S. (2021). Does Sentiment Impact Cryptocurrency? Journal of Behavioral Finance, 1–17. https://doi.org/10.1080/15427560.2021.1950723
Drobetz, W., Momtaz, P. P., & Schröder, H. (2019). Investor Sentiment and Initial Coin Offerings. The Journal of Alternative Investments, 21(4), 41–55. https://doi.org/10.3905/jai.2019.1.069
Gaies, B., Nakhli, M. S., Sahut, J. M., & Guesmi, K. (2021). Is Bitcoin rooted in confidence? – Unraveling the determinants of globalized digital currencies. Technological Forecasting and Social Change, 172(121038). https://doi.org/10.1016/j.techfore.2021.121038
Gontyala, S. P. (2021). Prediction of Cryptocurrency Price based on Sentiment Analysis and Machine Learning Approach. National College of Ireland, Ireland.
Gurdgiev, C., & O’Loughlin, D. (2020). Herding and anchoring in cryptocurrency markets: Investor reaction to fear and uncertainty. Journal of Behavioral and Experimental Finance, 25(100271). https://doi.org/10.1016/j.jbef.2020.100271
Kaminski, J. (2014). Nowcasting the Bitcoin Market with Twitter Signals. Social and Information Networks. https://arxiv.org/pdf/1406.7577
Sapkota, N. (2022). News-based sentiment and bitcoin volatility. International Review of Financial Analysis, 82, 102183. https://doi.org/10.1016/j.irfa.2022.102183
Vacca, S., Costerbosa, C. L., Spada, A., Riotta, G., & Uras, N. (2021). Investigation of Coronavirus impact on Blockchain and cryptocurrencies markets. In 2021 IEEE/ACM 4th International Workshop on Emerging Trends in Software Engineering for Blockchain (WETSEB) (pp. 56–60). IEEE. https://doi.org/10.1109/WETSEB52558.2021.00015
Zhang, J. (2020). Do Cryptocurrency Markets React to Issuer Sentiments? Evidence from Twitter. Advance online publication. https://doi.org/10.2139/ssrn.3675196