** Key Points **
– Bitcoin prices did not fall to zero despite the collapse of FTX crypto exchange
– Crypto investors heavily rely on social media for investment information
– Natural language processing (NLP) techniques applied to crypto-related comments on Reddit reveal sentiment analysis
– Sentiment analysis on different subreddits shows correlation with bitcoin prices
– The influence of social media forums on market behavior raises interesting questions about investing and herd behavior
When FTX, a crypto exchange, collapsed in November, many expected bitcoin prices to plummet, but bitcoin’s value has since increased. This leads us to question the source of investment information for crypto investors. According to a study by the National Opinion Research Center (NORC) at the University of Chicago, social media platforms provide 24% of information for crypto investors, while brokers and financial advisers contribute only 2%. Trading platforms and crypto exchanges contribute 25% and 26%, respectively.
To understand the impact of social media on the crypto market, we analyzed crypto-related comments on Reddit using natural language processing (NLP) techniques. We found that sentiment analysis correlated with bitcoin prices.
The discussion boards on Reddit have the power to influence markets. For example, the wallstreetbets subreddit sparked the GameStop short-squeeze in 2021, demonstrating the significant influence of these channels on finance and investing. Given the significant presence of crypto investors on social media, the impact of these subreddits is expected to be particularly strong.
During our study period (November 4, 2022, to January 15, 2023), we analyzed the sentiment on different subreddits related to finance and crypto. We created word clouds to visualize the topics of discussion.
We conducted sentiment analysis by isolating comments that implied a general connection to cryptoassets using seed words such as crypto, bitcoin, ethereum, cryptocurrency, cryptocurrencies, BTC, and blockchain. We analyzed the sentiment scores and summarized the results.
We tested various NLP models and selected a fine-tuned RoBERTa model developed by students from the National University of Singapore (NUS-ISS) for our sentiment analysis. The model labeled each comment as bearish or bullish and generated a daily mean as a sentiment proxy.
We combined the sentiment data from the different subreddits and plotted the five-day moving average of daily crypto sentiment alongside the price of bitcoin. We observed similar patterns in sentiment and bitcoin prices, with sentiment becoming more bearish after the FTX collapse and recovering shortly after. Non-crypto subreddits showed a lag in sentiment compared to crypto-specific subreddits.
We also analyzed the correlation between sentiment and bitcoin prices in each subreddit. We found that different subreddits had varying levels of correlation with bitcoin prices. Some subreddits showed a positive correlation, while others showed a negative correlation.
While our analysis provides some insights into the correlation between sentiment and bitcoin prices, further research using a more fine-tuned NLP model specifically trained on the Bitcoin subreddit could enhance the robustness of the results.
The findings of this study raise important questions about the influence of social media forums on market performance and the potential for herd behavior and groupthink to drive investment decisions. The reliance on social media for investment information may lead to increased market volatility.
In conclusion, our study highlights the importance of considering social media sentiment when analyzing the crypto market. The correlation between sentiment and bitcoin prices suggests that social media can have a significant impact on market behavior. However, it is essential to conduct further research to fully understand the complexities of this relationship.
Author : Editorial Staff
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