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Cryptocurrency is an innovative alternative to fiat currencies that has gained widespread interest in the last decade. Although there is considerable enthusiasm, there are also concerns about whether the technology can scale and prove itself as a true global currency.
The development of cryptocurrency has been driven by technological advances, which have enabled the rapid distribution and analysis of information in the financial markets. This real-time information flow is one of the main contributing factors in determining asset prices (Kalev et al., 2004).
While the most well-known example of a cryptocurrency is Bitcoin, it is only one of many digital systems built on the blockchain technology. Moreover, cryptocurrencies are subject to a different set of risks than traditional assets like stocks and bonds. Unlike traditional assets, which are subject to some level of regulation, cryptocurrencies lack any government backing and are not insured against loss. This makes them prone to volatile price swings and may expose investors to large losses.
This study investigates the impact of positive and negative news on the performance of cryptocurrencies. Specifically, we build a cryptocurrency news sentiment indicator using lexicon-based Natural Language Processing techniques. We then analyze the effects of this indicator on a cryptocurrency index, returns, volatility, and liquidity. We find that positive news sentiment boosts investor confidence in this asset class and increases returns. In contrast, negative news sentiment decreases returns and leads to uncertainty in the cryptocurrency market.