The Impact of News Sentiment on the Bitcoin Price via Machine Learning and Deep Learning‐Based NLP Models

Abstract

ABSTRACT This paper employs deep learning and machine learning‐based NLP models to investigate the impact of the news sentiment on the Bitcoin price. The lagged Bitcoin variables, news indicators, macroeconomic, and financial factors were taken into account to explain the importance of news sentiment on the Bitcoin price. Moreover, FinBERT‐based sentiment scores and semantic features extracted from over 650,000 financial news headlines were integrated with financial and macroeconomic variables. The importance scores of the investigation showed that Bitcoin was largely explained by its lagged price movements, which suggests the speculative nature of the cryptocurrency. However, the investigation also revealed that Bitcoin was significantly influenced by the news sentiment score. In other words, the paper indicates that the movements in the Bitcoin price can be predominantly explained by the news sentiment. Advanced hybrid models (all ML and DL models with the addition of variables obtained with the FinBERT model) were optimized using Optuna and RandomizedSearchCV. The FinBERT‐LSTM model achieved the best prediction accuracy. Nevertheless, the main findings indicated that the response of the Bitcoin price to negative news was much stronger than to positive and neutral news. This finding suggests that the asymmetric relationship between the Bitcoin price and news sentiment was evident. GARCH‐based volatility and what‐if scenario analyses further demonstrated that negative sentiment leads to sharper fluctuations in the Bitcoin price. The paper provides important implications for policymakers, portfolio managers, investors, and academics.