Social Learning and Sentiment Contagion in the Bitcoin Market

2024-05-07 11:01:31

Using novel data of social interactions and individual trading records in the Bitcoin market, we document evidence of social learning which leads to sentiment contagion. Investors significantly update their beliefs about Bitcoin in the same direction of average peer sentiment although it is not informative about future price. Our findings indicate inefficiency in social learning, consistent with echo chamber effect and selective interpretation of signals. Moreover, social learning affects both individuals’ trading decisions and aggregate market outcomes. We construct a novel measure for the intensity of sentiment contagion due to social learning. It significantly predicts Bitcoin volatility, volume and crash.

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