Social Media Discussion Plays a Key Role in Affecting Crypto Returns: Study

Researchers at Pennsylvania State University recently Analysis Can sentiment and sentiment around cryptocurrencies help predict returns? What they found may be the exact opposite of the respective financial markets.

According to the team’s research paper, while social media plays a large role in adoption and activity rates, cryptocurrency journalism is not a great predictor of market movement:

“Our findings indicate that social media sentiment significantly predicts crypto returns, whereas news media sentiment does not.”

Researchers used natural language processing to analyze millions of financial news articles and social media comments and generated sentiment scores on 53 topics and attention metrics for more than 300 cryptocurrencies.

They then compared the ground reality with matching news stories and social media sentiment over a given time period.

Perhaps most interesting of their findings is their conclusion that social media sentiment is a good predictor of crypto returns, but the risk premium channel is not.

The risk premium channel is a lens through which consumers make investment decisions. It is directly related to the volatility of the market and the asset.

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Cryptocurrencies are often discussed as highly volatile assets. In typical markets, such volatility typically leads to higher risk premiums and lower adoption and activity.

Research the housing market as an example shows As market volatility increases, consumer sentiment tends to wane and prospective buyers become risk averse.

Research by the Penn State team indicates that this is not the case with cryptocurrencies. In their conclusion, the team writes that market enthusiasm is positively related to momentum but that it “does not positively predict volatility.”

“This suggests,” the paper continues, “that sentiment affects returns through price perception and demand shocks, rather than through the risk premium channel.”

The researchers eventually concluded that this could be due to the large number of consumer investors with large cryptocurrency portfolios active on Crypto Social. They also suggest that further research on the relationship between social media sentiment and crypto returns is warranted.