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

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.