Even though the first cryptocurrency was established in 2008, it was not until 2016 before researchers started paying attention to the role of emotions in the crypto market. The interest accelerated even more in the following years.
Based on a research methodology following the prominent guidelines by Webster and Watson (2002), 86 papers in top journals were structure and analysed. The studies have been conducted from different points of view and are grouped according the role of emotions in crypto trading.
On the left side are the context in which authors refer to sentiment as one among many other factors driving crypto trading behaviour. The rest focus on emotions as an integral part of crypto trading. Most of the research is set to establish and test the relationship between sentiment and the market variables of return, price, volatility and trading volume. Some of them also compare these variables with those other markets. Further, the timing effects of up and down markets, bubble formations and big events, such as COVID-19, alter the established relationships.
Market response to sentiment
- Immediate effect
- Positive relationship
- Appreciation over time
- Negative effect of polarisation
- Larger impact than other markets
- Most vulnerable when prices are high
- Uncertainty keeps the momentum for longer
- Short term effects
- Positive relationship
- Responds to both positive and negative news
- Negative tone has more explanatory power
- Current returns contribute to the Fear of Missing Out (FOMO)
- Future returns do not respond to current moods
- A price-risk measure
- Higher than in other markets
- Interdependencies between cryptocurrencies
- Increasing factors - fraud and hacking news
- Decreasing factors - regulation and shared emotions
- Highest by high invertor attention and sentiment disagreement
- Short term effects
- Increases with polarisation
- Main determinants: price, volatility, return
- Supply: issuance of ICOs to signal company value
- Demand: fueled by positive sentiment and optimism
- Uncertainty drives up activity due to Fear of Missing Out
- Formed by trust
- Short term effects
- Approximated to trend value
- Little research with contradictory outcomes
- Need for future investigations to draw conclusions
🕑 Timing effects as moderators - Bubbles
- Easier to form than in other markets
- Happening more frequently
- Having higher volatility
- COVID-19
- Initially considered as a “Bubble Stage”
- The uncertainty was kept for too long
- The relationship between sentiment and the trading variables is stronger after the pandemic
💡
Summary
The crypto trading variables of price, return, volatility and trading volume can be predicted in the short term. Including sentiment in the prediction models increases accuracy.
Most used is public sentiment measured by reaction to news and social media.
Overall positive and negative emotions are used more often than specific emotional states. The tone in news and social media tends to be more positive, which explains the price appreciation over time.
Knowledge gaps
While the overall positive and negative emotions have been widely studied, the specific emotions have been examined in detail in only less than half of the sample.
The real value of crypto assets is difficult to be estimated. The current research is scarce and brings contradictory results. Future investigations should point to more specific evidence to draw conclusions.
Uncertainty can prolong the short term impacts of emotions. However, it is not clear whether they fade completely over time.
🔝 Back to top
