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Researchers at Pennsylvania State University have led a study to explore whether attitudes and emotions that surround cryptocurrencies could serve as predictors of their profitability. The study’s findings shed light on the unique dynamics of the cryptocurrency market compared to traditional financial markets.
Social Media’s Influence on Adoption and Activity
The study emphasizes how important social media is in influencing acceptance rates and bitcoin activities . By analyzing millions of financial news stories and social media comments the team used natural language processing techniques to provide sentiment ratings for various subjects and attention measures for more than 300 cryptocurrencies.
Contrasting Predictive Power
In an interesting contrast the study also revealed that social media sentiment significantly predicts cryptocurrency returns whereas sentiment in news media does not have the same impact . This finding challenges the notion that traditional cryptocurrency journalism plays a major role in forecasting market movements.
Risk Premium Channel and Market Volatility
The research also looks at the risk premium channel which influences consumer investment decisions and is closely tied to market volatility . Rising volatility typically leads to a higher risk premium in traditional markets as well as lower adoption and activity.
According to the experts the connection between emotion and returns in the bitcoin market is clear compared to traditional markets . Even though cryptocurrencies are frequently associated with significant volatility the study claims that the major ways in which emotion influences returns are through demand shocks and price sentiment rather than the risk premium channel . The research invalidates the idea that heightened emotion increases market risks by showing that volatiliity is not predicted straight by sentiment.
