Virtual influence, real impact: Deciphering social media sentiment and its effects on cryptocurrency market dynamics

Abstract

This research investigates the effect of social media sentiment on the cryptocurrency market, particularly focusing on Bitcoin and Ethereum. Using TensorFlow as a machine learning tool, we developed a sentiment index from 66,582 Reddit posts about Bitcoin and 23,231 about Ethereum, collected in 2022. The sentiment scores, ranging from -1 (negative) to 1 (positive), were categorized into positive, neutral, and negative classes and analyzed alongside daily return and volatility metrics for both cryptocurrencies using a Vector Autoregression (VAR) model. Our study identifies significant impacts of social media sentiment on cryptocurrency markets. Specifically, Bitcoin’s returns show a heightened sensitivity to negative sentiment, whereas Ethereum’s returns remain unaffected by any sentiment type. However, the volatility of both cryptocurrencies is affected by neutral sentiment. These findings highlight distinct behavioral patterns across cryptocurrencies and uncover a bidirectional relationship between market dynamics and social media sentiment. This study offers novel insights into how public perception influences digital asset markets, thereby contributing to the behavioral finance literature and providing practical implications for investors and policymakers.