Do FEARS drive Bitcoin?

Tobias Burggraf, Toan Luu Duc Huynh, Markus Rudolf and Mei Wang

Review of Behavioral Finance, 2020, vol. 13, issue 3, 229-258

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: Bitcoin; Investor sentiment; Transfer entropy; Threshold regression; C24; G15; E42 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-11-2019-0161

DOI: 10.1108/RBF-11-2019-0161

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