Cryptocurrency news is an incredibly fast-moving and volatile industry. It keeps investors, observers and regulators on their toes as mainstream companies explore the potential of digital currencies like Bitcoin and Ethereum for new markets and opportunities.
A cryptocurrency is a medium of exchange that uses cryptography to control its creation and transactions. Its legitimacy is largely determined by the fact that it is decentralized, with ownership distributed between many parties on a blockchain. This allows for quick, secure, and low-cost transactions across borders.
Bitcoin is the most prominent example of a cryptocurrency. Created by a mysterious person or group known as Satoshi Nakamoto, it is a digital payment system and currency that operates independently from traditional financial systems and governments. It is based on peer-to-peer transfers on a digital network that chains transaction histories using the open-source program bitcoin. Users can store coins in wallets on their computer, phone or hardware device, and can swap them for ‘ordinary money’ like pounds at crypto exchanges.
We construct cryptocurrency-specific news sentiment by measuring the frequency and tone of daily cryptocurrency headlines. We find that positive news increases investor confidence, thereby increasing returns, while negative news causes uncertainty and reduces returns. Bitcoin experiences a “negativity effect” even more than other cryptos. Furthermore, we find that uninformed investors herd during periods of positive news sentiment and that informed investors act as contrarians during periods of negative news sentiment. Finally, positive (negative) news sentiment increases (decreases) the liquidity in the cryptocurrency market due to noise trading and reduced adverse selection costs.