Behavioral Finance in Cryptocurrency Markets: Assessing Herding Behavior and Volatility

Abstract

This research examines the influence of herd mentality on market volatility, with a particular emphasis on the behavioral finance principles that contribute to the volatility of cryptocurrency markets. The participation of a diverse and global group of participants in cryptocurrency markets, in contrast to traditional financial markets, frequently results in significant volatility and speculative trading. This research investigates the extent to which investors exhibit a flocking tendency, which is the propensity of individuals to follow the actions of the majority rather than relying on their own independent analysis. The research employs sentiment analysis on market data and social media activity, as well as econometric models, to quantify the extent of herding during periods of elevated market volatility. The results should enable the development of risk-mitigation strategies during these unpredictable periods and provide insight into the cognitive factors that influence decisions regarding bitcoin investments.