Riding the Waves of Crypto Sentiment: Examining the Dynamics Between Returns and Sentiment in the Cryptocurrency Market
Albrecht, Peter; Maňoušek, David; Pastorek, Daniel
Year: 2025 Volume: 75 Issue: 2 Pages: 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.
JEL classification: G12, G17, G41
Keywords: sentiment, fear & greed index, cryptocurrencies, wavelet coherence, VAR
DOI: https://doi.org/10.32065/CJEF.2025.02.01
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