Crypto-Currencies: does sentiment play a role?

Simões, João Nuno Marchão Casal

http://hdl.handle.net/10400.26/35911

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Authors

Simões, João Nuno Marchão Casal

Advisor(s)

Pinheiro, Carlos

Abstract(s)

This Master Thesis addresses the relationship between Market/ Investor Sentiment and the Crypto-Currencies Market using a database with 28 variables, such as the Crypto-Currencies Prices (Crypto-Currencies that had more than one Billion USD in Market Cap were selected), the S&P500 Index stock prices, the GDP of the US or Europe, Internet World Statistical data, among others, but most importantly Investor/ Market Sentiment data, gathered from Duke’s University surveys. All this data was then entered into SPSS and analyzed as Panel Data. The time period for this research spans from 2013 to 2019, 2013 because it is the first year were the market prices of Crypto-Currencies are available. Even though Bitcoin was created in 2008 (Nakamoto, 2008), market data about Crypto-Currencies only appeared in 2013. We run OLS and 2SLS regressions to test the significance, causality and the relationship between Sentiment and Crypto-Currencies. For the 2SLS, two Lagged variables were added. Additional Robustness tests were done including regressions with only Bitcoin and Litecoin. With this we find that there is a strong correlation and significance between the level of optimism and/ or pessimism in the financial markets and in Crypto-Currencies and that the relationship between them is mostly non-linear according to our research and analysis. Our results suggest that the price of Crypto-Currencies is an increasing function of sentiment, which calls for considering Behavioral Economics tenets when analyzing Crypto-Currencies markets’. Our findings are confirmed by robustness tests deploying alternative measures of the variable of interest – Sentiment – as well as alternative controls. The findings suggest that more regulation in the market is needed to avoid extreme volatility for investors. Crypto-Currencies show bigger growth when the sentiment towards the market is pessimistic, such as when there is a crisis either a monetary or a political one, because Crypto-Currencies are still associated with somewhat non-deterministic movements. It is now our job to pursue regulation and to attract more corporate investors so that Crypto-Currencies could start to be more accepted as financial assets, and not to be seen as just “internet money”, as unfortunately they are still perceived by many nowadays.