Ural Federal University: Social Media and Trust Affect the Bitcoin Price

A sharp increase in Bitcoin’s popularity or hype, which manifested itself through a rise in the number of Bitcoin-related Google queries, has resulted in an increase in Bitcoin price. This effect corresponds to the description of the “collective hysteria” that spread in the online community and was triggered by the increasing volatility of the Bitcoin market. Secondly, Bitcoin’s popularity among ordinary Internet users has a positive impact in low-volatile and highly volatile rising markets but a negative one in a highly volatile falling market. Bitcoin’s popularity among informed Internet users has a negative impact on Bitcoin price in a period of low volatility. The uninformed users’ trust in Bitcoin has a positive influence on Bitcoin price in low-volatile and highly volatile falling markets. Finally, the main factors that shape the Bitcoin market are trust and popularity.

These conclusions were reached by Aleksandr Nepp and Fyodor Karpenko, Associate Professor and PhD student of the Department of International Economics and Management at Ural Federal University. Their conclusions are the result of an analysis of how Google search queries, likes and reposts of social network users concerning bitcoins influenced the market for this cryptocurrency from October 2013 to August 2018. The volume of requests characterized the popularity of bitcoin, the number of likes and reposts – the level of trust in the information and between Internet users. The specified time interval was chosen for analysis, firstly, because it covered periods of both stability and instability in the bitcoin market, and secondly, because of the need to cut off the phase of the coronavirus pandemic impact on the market. The article by Aleksandr Nepp and Fyodor Karpenko with a description of the conducted research and its results was published in the scientific magazine Journal of Behavioral Finance.

According to the co-authors, their conclusions may be in demand not only by investors, but also by financial market regulators. Since standard measures of national regulators’ influence on bitcoin as a supranational payment unit are not applicable, their activity on the Internet, the researchers believe, can be noticeably more active.

“Following behavioral finance theory and crowd psychology, we suggest that information is the means by which regulators can influence crypto markets,” says Aleksandr Nepp.

Earlier papers by foreign researchers have shown that bitcoin exchange rate dynamics in relatively stable markets have a positive effect on the popularity of this cryptocurrency. This is expressed in an increase in the number of queries about bitcoin in the Google search engine. Using mathematical models to trace cause-and-effect relationships, the researchers found that bitcoin’s popularity, in turn, determines its price to an even greater extent.

“In a stable or rapidly growing market there is a positive impact, but in a falling market the dissemination of information about bitcoin in this environment has a negative impact on the volatility of cryptocurrency,” notes Fyodor Karpenko.

Further, according to one of Aleksandr Nepp and Fyodor Karpenko’s hypotheses, in cases of financial market shocks and subsequent excitement, the importance of broad Internet user awareness of bitcoin for its price increases significantly.

“The relevance of this hypothesis is explained by the fact that since 2017, the instability, volatility of the bitcoin market is growing, and this causes waves of hype and “collective hysteria” in the online community, though short-term, but quite destructive. This picture is also characteristic of the stock and currency markets,” says Aleksandr Nepp.

Mathematical analysis allowed the authors of the article to identify emotional outbursts in those interested in bitcoin during times of high volatility. Poorly informed Internet users, who under the influence of hype (hysteria) ignored rational assessments and recommendations of professional market participants, demonstrated particular emotionality. This conclusion corresponds to the descriptions of the nature of “collective hysteria” by such a classic of crowd psychology as Gustave Lebon: according to his concepts, in groups whose members are infected with fear and hysteria, panic ideas and irrational behavior spread like an infection.

“The development of the Internet has transformed small online groups into vast communities to which theories and models of collective behavior are applicable. However, research on the impact of crowd behavior on cryptocurrency markets and bitcoin in particular is scarce. Our work was aimed at bridging this gap,” says Aleksandr Nepp.

As for qualified Internet users, their attention to bitcoin, determined by the number of comments on the Internet, has a significant negative impact on the volatility of the cryptocurrency in the absence of shocks and when volatility is low. Under these conditions, market conditions are dictated by the canonical rule: the higher the demand, the higher the price and, therefore, the volatility. No such effect has been observed in rising or falling markets.

Nepp and Karpenko found that markets are influenced by reposts, which indicate the confidence of informed users in bitcoin. In growing markets with low and high volatility, the effect of reposts leads to an appreciation of bitcoin, while in sharply falling markets it leads to the opposite result. By applying causality tests, the authors proved the absence of inverse effects. In other words, it is the volatility of the cryptocurrency that is influenced by the trust and popularity of Internet users, not the other way around.

“Most studies on the impact of user popularity, trust and knowledge on financial markets and directly on the bitcoin market use data on markets with a relatively stable uptrend and low volatility. Thus, these studies do not take into account the ups and downs of bitcoin prices. In addition, previous works did not link Internet user activity to behavioral aspects. Therefore, there was an obvious lack of empirical research on the influence of popularity and trust on the volatile bitcoin market with high volatility. With our work we tried to fill this gap as well,” comments Aleksandr Nepp.

The point of the article is, as the authors point out, that unlike 20-30 years ago, nowadays, when thanks to the Internet information and emotions spread with great speed and to a huge audience, the role of behavioral factors in financial markets, especially in periods of volatility, has not only grown, but has become crucial.

The research of UrFU economists was supported by the Russian Foundation for Basic Research (grant № 20-04-60158). The scientists plan to conduct a content analysis of Internet comments of bitcoin market players.