Riding the Waves of Crypto Sentiment: Examining the Dynamics Between Returns and Sentiment in the Cryptocurrency Market

Peter Albrecht, Daniel Pastorek and David Manousek
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Peter Albrecht: Mendel University in Brno, Faculty of Business and Economics, Czech Republic
Daniel Pastorek: Mendel University in Brno, Faculty of Business and Economics, Czech Republic
David Manousek: Mendel University in Brno, Faculty of Business and Economics, Czech Republic

Czech Journal of Economics and Finance (Finance a uver), 2025, vol. 75, issue 2, 98-127

Abstract: This study examines the relationship between investor sentiment and market dynamics across the five largest cryptocurrencies—Bitcoin, Ethereum, Binance Coin, Ripple, and Cardano. Using the Crypto Fear & Greed Index as a proxy for market sentiment, we apply wavelet coherence to investigate the co-movement between sentiment and cryptocurrency returns across time and frequency domains. In parallel, impulse response functions from a vector autoregression framework are employed to assess how return shocks—particularly in Bitcoin—propagate through financial uncertainty, subsequently influencing sentiment and trading activity. Our findings reveal that sentiment functions as a robust leading indicator within an investment horizon of one week to one month, during which notable shifts in trading volume are observed. These results enhance our understanding of sentiment-driven behavior in crypto markets and provide actionable insights for short-term forecasting and investment strategy design across different time horizons.

Keywords: sentiment; fear & greed index; cryptocurrencies; wavelet coherence; VAR (search for similar items in EconPapers)
JEL-codes: G12 G17 G41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:75:y:2025:i:2:p:98-127

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