Bitcoin fears - strange
Do FEARS drive Bitcoin?
Abstract
Purpose
This study examines the prediction power of investor sentiment on Bitcoin return.
Design/methodology/approach
We construct a Financial and Economic Attitudes Revealed by Search (FEARS) index using search volume from Google's search engine to reveal household-level (“bankruptcy”, “unemployment”, “job search”, etc.) and market-level sentiment (“bankruptcy”, “unemployment”, “job search”, etc.).
Findings
Using a variety of quantitative methodologies such as the transfer entropy model as well as threshold regression and OLS, GLS and 2SLS estimations, we find that (1) investor sentiment has strong predictive power on Bitcoin, (2) household-level sentiment has larger effects than market-level sentiment and (3) the impact of sentiment is greater in low sentiment regimes than in high sentiment regimes. Based on these information, we build a hypothetical trading strategy that outperforms a simple buy-and-hold strategy both on an absolute and risk-adjusted basis. The results are consistent across cryptocurrencies and regions.
Research limitations/implications
The findings contribute to the ongoing debate in the literature on the efficiency of cryptocurrency markets. The results reveal that the Bitcoin market is not efficient in the sense of the efficient market hypothesis – asset prices do not fully reflect all available information and we were able to “beat the market”. In addition, it sheds further light on the debate whether Bitcoin can be considered a medium of exchange, i.e. a currency or an investment product. Because investors are reallocating their Bitcoin holdings during times of increased market sentiment due to liquidity needs, they obviously consider bitcoin an investment product rather than a currency.
Originality/value
This study is the first to examine the impact of investor sentiment measured by FEARS on Bitcoin return.
Keywords
Acknowledgements
We thank Andrew Urquhart, Larisa Yarovaya, Duc Khuong Nguyen, Masaaki Fukasawa and seminar participants of the 2019 Cryptocurrency Research Conference, the 7th Asian Quantitative Finance Conference (AQFC) and the International Conference on Business and Finance 2019 for helpful comments and discussions. We are responsible for remaining errors.
Citation
Burggraf, T., Huynh, T.L.D., Rudolf, M. and Wang, M. (2020), "Do FEARS drive Bitcoin?", Review of Behavioral Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/RBF-11-2019-0161
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:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited
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