One crash, too many: Global uncertainty, sentiment factors and cryptocurrency market

Abstract

Recent studies document that cryptocurrencies offer an alternative store of value, medium of exchange and can be used to hedge against currency and price fluctuations. However, the frequent collapse of the crypto-market undermines its safe-haven characteristics, as investors’ fear and anxiety could intensify market volatility and trigger a financial crisis. Motivated by the current global vicissitudes, this study examines the impact of uncertainty and sentiment factors on price behaviour of cryptocurrencies. To estimate our model, we used daily, low, high and closing price data for major crypto projects, from January 2018 to January 2023. We show that economic and political uncertainty factors significantly drive crypto prices. Furthermore, the interaction between sentiment dynamics as expressed by investors on different social platforms has a significant adverse effect on the returns of the cryptocurrency market, and the impact is more pronounced for tokens within the same ecosystem. Using the asymmetric GARCH-MIDAS model and TVP-VAR, we also demonstrate the existence of a significant contagion among tokens within the same ecosystem when bad (or good) news occurs. Considering the massive unprotected losses incurred by crypto investors during crises, our results provide important insights into how portfolio managers can effectively design investment strategies.