Forbes’ comprehensive source for the latest cryptocurrency news, cutting-edge blockchain updates, Web3 developments and all things Bitcoin.
Cryptocurrencies like Bitcoin and Ethereum are digital assets that allow for peer-to-peer (or person to person) transactions without a central party. These currencies are also not backed by any government, meaning that their value is determined solely by supply and demand and that the value of your investment can swing wildly.
The volatility of cryptocurrencies can lead to huge gains for investors, but the same volatility can also wipe out your entire investment. Furthermore, cryptocurrencies are not regulated by any government agency, so investors are subject to much more risk than traditional investments in stocks and bonds.
Despite these concerns, there is growing interest in cryptocurrencies, which have seen their prices soar this year. However, many experts are skeptical that they will ever replace more traditional forms of money or become a store of value.
Using a data set of daily cryptocurrency news, we examine the impact of news sentiment on cryptocurrency returns, volatility and liquidity. We find that positive news increases investor confidence and drives higher returns, while negative news causes uncertainty. Moreover, young cryptocurrencies exhibit an inverted asymmetric volatility effect: positive news triggers the participation of uninformed traders who buy due to the “fear of missing out” phenomenon and pump-and-dump schemes. In contrast, informed and uninformed traders trade less during negative news periods, causing lower volatility. In short, cryptocurrencies are volatile and not suitable for all investors.