A bubble that burst but didn’t deflate
When financial bubbles burst, they usually burst. So when cryptocurrency exchange FTX collapsed last November, many crypto skeptics expected Bitcoin’s price to drop to what they believed it deserved: near zero. . But as of this writing, Bitcoin is worth more than it did before his FTX collapse. So what can we do with all this?
An important consideration is where crypto investors get their investment data from.according to 2021 study by the National Opinion Research Center (NORC) At the University of Chicago, crypto investors get 24% of their information from social media and only 2% from brokers and financial advisors. Trading platforms and cryptocurrency exchanges contribute an additional 25% and 26%, respectively.
So how does this reliance on social media drive crypto market behavior? We applied natural language processing (NLP) techniques to the comments and investigated how the resulting sentiment analysis correlated with the price of Bitcoin.
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Crypto Market Background
subreddit | Subscriber (a million) |
Cryptocurrency | 6 |
Bitcoin | 4.8 |
personal loan | 17.3 |
stock | 5.1 |
economic | 3.1 |
stock market | 2.6 |
Invest | 2.2 |
finance | 1.7 |
Topic-specific discussion boards that Reddit users subscribe to can move the market. The wallstreetbets subreddit, for example, ignited GameStop’s short squeeze in 2021, showing how these channels can have a significant impact on finance and investment. Given the prevalence of cryptocurrency investors on social media, we expected the impact of these subreddits to be particularly pronounced. The most popular financial and crypto-related subreddits based on total number of subscribers are listed in the attached chart. .)
The name of each subreddit gives a sense of its general focus, but the word cloud below, which corresponds to the study period (November 4, 2022 to January 15, 2023), provides a more detailed picture. Provided and covers the lead-up to the FTX collapse on November 6th when the analysis was done.
Subreddit Word Clouds, Nov 4, 2022 to Jan 15, 2023
![A word cloud showing the results of CryptoCurrency and Economic Subreddits](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/02/CryptoCurrency-and-Economics-Subreddits-Word-Clouds.png?resize=640%2C240)
![Investing in bitcoin and subreddits word cloud](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/02/Bitcoin-and-investing-subreddit-word-clouds.png?resize=640%2C244)
![StockMarket and Finance subreddits word cloud](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/02/StockMarket-and-Finance-subreddit-word-clouds.png?resize=640%2C243)
![Stock and personal finance subreddit word cloud](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/02/stocks-and-personalfinance-subreddit-word-clouds.png?resize=640%2C239)
Out of the hundreds of thousands of comments made to these subreddits during the research period, we found those that hinted at crypto sentiment based on seed words that indicate a general rather than a specific relationship to crypto assets. separated. For example, we excluded FTX as it may betray sentiment bias given the controversy surrounding it. On the other hand, cryptocurrency, bitcoin, ethereum, cryptocurrency, cryptocurrency, BTC, and blockchain are more neutral and one of the seed words that guided our analysis. The results are summarized in the table below.
Subreddit summary stats
subreddit | total number of comments | Average crypto related Comments per day1 |
number of days in crypto Related comments2 |
Cryptocurrency | 130,055 | 1,782 | 73 |
Bitcoin | 29,538 | 405 | 73 |
personal loan | 314 | Five | 54 |
stock | 1,388 | 19 | 71 |
economic | 1,583 | twenty two | 67 |
stock market | 2,747 | 38 | 72 |
Invest | 2,547 | 35 | 72 |
finance | 487 | 11 | 27 |
2. Total number of days included in the analysis during the 73-day study period.
model methodology
We tested many open source NLP models before choosing a fine-tuned model. roberta model Developed by students at the National University of Singapore (NUS-ISS). To conduct sentiment analysis. The model has been trained on his 3.2 million comments from the StockTwits investment forum, which was a natural choice given the similar domain and large training set. Roberta is Revolutionary BERT model Developed by Google’s artificial intelligence (AI) team in 2018. Through its ability to parse context, BERT models have improved the accuracy of NLP tasks by applying an attention mechanism that determines how words relate to each other. These attention mechanisms are the same constructs used in other large language models, such as ChatGPT by OpenAI.
The RoBERTa model labeled crypto-related Reddit comments as 0 or 1, respectively, meaning bearish or bullish, respectively, and generated daily averages as a proxy for sentiment. For example, a score of 0.5 indicates that bullish and bearish comments are the same. Some labels were inaccurate due to differences in StockTwits and Reddit domains and how users commented on them. However, we do not believe this will have a material impact on our results, as we are more concerned with the impact of FTX’s collapse on sentiment than an absolute measure of crypto-related sentiment.
result
To get a more complete picture, we combine all non-crypto related subreddits and take a 5-day moving average of daily crypto sentiment for crypto and non-crypto related subreddits, along with I have plotted the price of Bitcoin. Below the first chart is the number of comments for each day.
Crypto and Non-Crypto Subreddits: 5-Day Moving Average of Sentiment and Bitcoin Close Price
![Chart showing crypto and non-crypto subreddits: 5-day moving average of sentiment and closing price of Bitcoin.](https://i2.wp.com/blogs.cfainstitute.org/investor/files/2023/02/Crypto-Non-Crypto-five-day-Moving-average-sentiment-vs-Bitcoin-Close-Price2.png?resize=640%2C272)
The three time series have some similarities. Both show that crypto sentiment was more bearish before and after the FTX demise, then quickly recovered, with non-crypto subreddits lagging their crypto-specific peers. With the non-crypto subreddit broken, the relationship seems a little more tenuous.
Economic Sentiment vs. Crypto Sentiment and Bitcoin Closing Price
![Graph showing economic sentiment and cryptocurrency sentiment, as well as the closing price of Bitcoin](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/02/Economics-Sentiment-vs-crypto-sentiment-and-bitcoin-close-price-1.png?resize=640%2C318)
Investment Sentiment vs. Crypto Sentiment and Bitcoin Closing Price
![Chart showing investment sentiment vs. crypto sentiment and bitcoin closing price](https://i2.wp.com/blogs.cfainstitute.org/investor/files/2023/02/investing-Sentiment-vs-Crypto-Sentiment-and-Bitcoin-Close-Price.png?resize=640%2C312)
Stock Market Sentiment vs Crypto Sentiment and Bitcoin Closing Price
![Graph showing stock market sentiment vs cryptocurrency sentiment and bitcoin closing price](https://i2.wp.com/blogs.cfainstitute.org/investor/files/2023/02/StockMarket-Sentiment-vs-crypto-sentimen-and-bitcoin-close-price.png?resize=640%2C306)
personalfinance sentiment vs. crypto sentiment and Bitcoin closing price
![](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/02/personalfinance-Sentiment-vs-Crypto-Sentiment-and-Bitcoin-Close-Price.png?resize=640%2C315&ssl=1)
Financial Sentiment vs. Crypto Sentiment and Bitcoin Closing Price
![Graph showing financial and cryptocurrency sentiment and Bitcoin closing price](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/02/finance-Sentiment-vs-Crypto-Sentiment-and-Bitcoin-Close-Price.png?resize=640%2C316)
Stock Sentiment vs. Crypto Sentiment and Bitcoin Closing Price
![Chart showing stock sentiment, cryptocurrency sentiment, and Bitcoin closing price](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/02/stocks-Sentiment-vs-Crypto-Sentiment-and-Bitcoin-Close-Price.png?resize=640%2C313)
There is no clear sentiment trend in the economic, financial and personal finance subreddits, but the stock market, stocks and investments are showing bullish gains a week or two before bitcoin prices resume their rally. increase.
The correlation matrix below, which shows the relationship between average daily sentiment and Bitcoin price for each subreddit, pretty much tells the same story. For example, cryptocurrency sentiment about the economy correlates with Bitcoin price by -0.034, highlighted by the purple circled cell.
crypto sentiment daily average correlation matrix
![Graph showing the daily average correlation matrix of crypto sentiment](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/02/Daily-Mean-Sentiment-Correlation-Matrix-2.png?resize=640%2C218)
So how did daily sentiment scores relate to future Bitcoin prices? To answer that question, we added three more datasets: Day 1, Day 2, and Day 3. Ahead, or BTC-USD +1, +2, +3. CryptoCurrency had the highest correlation with current BTC price (red box), Bitcoin subreddit had relatively low correlation (orange box) but increased to future price (black box). I was. sentiment score.
The financial subreddit showed a negative correlation (green outline). The forums focus on traditional financial topics such as finance-related careers, homework, and applications, so community his members may be skeptical of Bitcoin’s underlying value, and that it’s relevant. may be explaining Of course, our crypto seed word wasn’t particularly common, occurring only 27 of the 73 days during our review, making up the smallest sample size of all subreddits, so we can’t draw any firm conclusions. There may not be enough data to derive.
Other subreddits showed a low correlation with Bitcoin price. The StockMarket (yellow outline) had a slightly lower correlation with the intraday price of Bitcoin than the CryptoCurrency, but did not maintain the same relationship with the future price. Bitcoin’s 1-, 2-, and 3-day-ahead correlations are similar in direction to the correlation between Bitcoin’s price and its future price (white outline), similar to autocorrelations commonly observed in equities. match.
implication
Sentiment data from various subreddits suggest a correlation with Bitcoin price, but a more fine-tuned NLP model specifically trained on the Bitcoin subreddit rather than StockTwits increases the robustness of these results. , which may assess the accuracy of the model. Despite these caveats, our analysis raises some interesting questions about how social media forums affect market performance. Of particular note is how quickly sentiment recovered after the FTX demise and the prediction of a new Bitcoin price rally.
Findings like this have a lot to say about the future of cryptocurrency investing as well as investing more generally. As more people turn to social media forums to inform investment decisions, collective action and self-reinforcing groupthink are likely to become more common, prompting investors to understand their fundamental values. You may come to follow investment narratives with little or no basis for And regardless of your views on crypto, it’s a recipe for increased market volatility.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images / metamorworks
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