Breaking news headlines: Impact on trading activity in the cryptocurrency market

Abstract

Publicly available information plays a crucial role in shaping cryptocurrency investor sentiments. Past literature has used various measures to proxy sentiment. In this study, we construct a cryptocurrency-specific news sentiment from daily cryptocurrency news headlines. The sentiments are classified into positive and negative news sentiments to understand their differential impact on the trading activity of the cryptocurrency market. The results show that positive news boosts investor confidence, thereby increasing returns, and negative news causes uncertainty. The most dominant cryptocurrency, Bitcoin, experiences a “negativity effect,” i.e., the impact of negative news on returns is higher than positive news. On the volatility and liquidity front, positive (negative) news increases (decreases) the volatility and liquidity. Positive news triggers the participation of uninformed traders who buy due to the “fear of missing out” phenomenon and pump-and-dump schemes. Negative news reduces liquidity by creating uncertainty among informed and uninformed traders.