Cryptocurrencies have taken a fast-moving, volatile industry by storm. Get the latest cryptocurrency news, cutting-edge blockchain updates, and Web3 developments that keep investors, observers, and regulators on their toes.
While some see cryptocurrencies as transformational technologies, others worry they’re a fad. Schwab monitors these new financial assets, but we still recommend treating them as speculative investments outside a traditional long-term portfolio.
Some cryptocurrencies are intended to be used as units of exchange for goods and services, while others are stores of value or can be used to participate in specific software programs. The currencies are backed by technology known as blockchain, which creates a digital record of transactions that can be verified by anyone.
The rapid growth of cryptocurrency has attracted criminals who use the assets for illicit activities such as ransomware attacks, which shut down computer networks and demand payment in crypto, or to buy and sell narcotics, according to the U.S. Drug Enforcement Administration. In addition, cryptocurrency has become a popular way to launder money.
The volatility of cryptocurrencies has also created concerns about the impact on the environment. Bitcoin mining, for example, requires a huge amount of energy, and critics argue that the emissions from this activity contribute to climate change. But proponents of the currency say that they can reduce these environmental harms by switching to a “proof of stake” model that uses less electricity. This paper investigates whether positive and negative news sentiment influences cryptocurrency returns, volatility, and liquidity using a VAR-X approach. The analysis is based on cryptocurrency-specific news headlines, which are collected from the Refinitiv Eikon database1 from April 2013 to June 2021. The news sentiment is calculated by analyzing the qualitative text of these news headlines with a lexicon-based natural language processing tool. The results show that positive news sentiment increases cryptocurrency returns, volatility, and liquidity by triggering noise trading by uninformed traders and pump-and-dump schemes. Conversely, negative news sentiment decreases these metrics by causing uncertainty among informed and uninformed traders.
About the Author
