Since their creation in 2009, cryptocurrencies have transformed from digital novelties into trillion-dollar assets. They have become a popular tool for investors, who use them to buy a slew of goods and services, including software, real estate, and illegal drugs. To proponents, cryptocurrencies are a democratizing force, freeing people from the control of banks and Wall Street. Critics, however, have raised concerns about cryptocurrencies’ security, extreme market volatility, and high energy consumption.
Cryptocurrencies are not backed by any central bank and are therefore not protected by deposit insurance. Their volatile price swings can lead to large investor losses. As the cryptocurrency sector grows, many regulators are grappling with how to regulate it. In the United States, lawmakers have sought to bring cryptocurrencies into the traditional securities market by adding them to exchange-traded funds. Federal Reserve Chairman Jerome Powell has warned investors to be aware of the risks involved in crypto investing and urged them not to expect taxpayers to socialize their losses.
News coverage of cryptocurrencies plays a critical role in investor sentiments and the pricing of these assets. The authors use a news-sentiment indicator to examine how various types of news affect cryptocurrency prices, returns, and liquidity. The indicator is constructed using a lexicon-based Natural Language Processing technique and classified into positive and negative sentiments to examine how different news affects investor confidence in cryptocurrencies. During periods of positive news, traders trade with greater confidence and the market experiences higher returns. Conversely, during periods of negative news, the investor base is uncertain and the market experiences lower returns and liquidity.
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