Extrapolative beliefs about Bitcoin returns

Ralitsa Petkova

Finance Research Letters, 2023, vol. 56, issue C

Abstract: Using survey data from Sentix which records whether investors are bullish, bearish, or neutral about the future price of Bitcoin, we examine how investors form expectations about Bitcoin returns. We use a model for expectations with an exponential decay of weights on past returns and find that investors extrapolate from Bitcoin’s past returns in a way that puts more weight on more recent returns. Compared to institutional investors, individuals display a higher degree of extrapolation, consistent with the perception that nonprofessionals are more prone to behavioral biases. The extrapolative component of expectations is a significant predictor of Bitcoin returns in the short term, however, its explanatory power is small. Understanding how investors in the cryptocurrency market form their beliefs is important because variation in beliefs could affect Bitcoin price dynamics and potentially lead to excess volatility, momentum, and reversal.

Keywords: Bitcoin; Cryptocurrency; Extrapolation; Extrapolative beliefs (search for similar items in EconPapers)
JEL-codes: D84 G41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323004415

DOI: 10.1016/j.frl.2023.104069

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