Over the last ten years, cryptocurrencies have evolved as a revolutionary force in the financial landscape. As a decentralized media of exchange, they seem all set to redefine classical commerce. Popularity and value have found an influx due to the allure of cryptocurrencies demonstrating a huge departure towards digital solutions in financial matters. Also, the use of social media has gone up to be a part of normal life and forming public opinion. This is pretty interesting, meaning that social sentiment on those trends is actually critically shaping the trends and trajectories of the cryptocurrency markets, especially over platforms like Twitter and Reddit. The influence of digital channels has grown because the interest of investors and enthusiasts from all over the world has been focusing more on them, thus the impact of such collective sentiment on market dynamics has developed into a critical area of study and potentially heralds a new era of financial decision-making based on the social networks we all use daily.

Why You Should Care

Since the boom of the internet, people have increasingly been searching for their news online. In the last decade, this has become even more pronounced as the death of print and the rise of digital media have fully taken their course. People are moving almost exclusively to digital media, with a large portion of it coming from social media. Gone are the days when people relied simply on The New York Times or Barron’s to receive information on the markets. It is easier than ever for anyone to attract an audience and have the ability to sway their decision-making process. This trend is shown in the graph below, where we see a shift in the pronounced increase in online news consumption, which soared from just under 60% in 2013 to above 70% by 2016. During the same period, there was a notable surge in the use of social media as a news source, coinciding with the large rise of interest in cryptocurrency. At the same time, print media usage fell from around 40% to 20%.

With more and more people turning to digital forms of media, especially social media, to receive their news, it is more imperative than ever to be aware of the impact these mediums have on the crypto world and how to best leverage profits from it.

Following this, another reason for the need to pay attention to cryptocurrency is its prominence as a financial figure. Over the greater part of a decade, we have seen that Bitcoin has transformed from something the majority of the fiscal world scoffed at, to a serious contender that has the ability to shake up the global markets as a whole. This is reiterated by the figure below, where we see the rise in popularity among retail investors over the years. The data is compiled from Google search inquiries and is a comparison of stocks with similar market caps as Bitcoin.

It can be seen how Bitcoin has grown to be more popular than two giant tech firms as well as the Goliath of the S&P index fund. This illustrates how prominent Bitcoin is, even against the titans of the industry.

Finding The Trends

Twitter Based Research

When looking for trends in the relationship between crypto and social media, the best place to start is Twitter (now called X). Twitter is seen by most as a hub of financial sentiment data. Millions of users are constantly talking about cryptocurrencies, with their tone towards it being good, bad, or indifferent. The graph below shows the accumulation of tens of thousands of tweets between 2022 and 2023. These tweets were picked due to their mentioning of Bitcoin or other various keywords surrounding the token. These tweets were then analyzed and categorized by their sentiment towards Bitcoin. The result is the graph below which shows a large amount of neutral tweets, with positive tweets being the second most common and negative tweets being the least. The important trend to see here is that all three tweet sentiments mostly react together, meaning large spikes, either up or down, are seen for all three sentiments at the same time. This shows how people are reacting to different news surrounding Bitcoin in a uniform way, allowing the relationship between the price and sentiment to be consistent.

The next graph takes the sentiment data from above and averages it out. Then, the data is compared to the price action of Bitcoin over the same time period. The closing price for each day was used as the daily price indicator. The result is a graph that shows the sentiment score to be a good indicator of the future price of Bitcoin. It is seen multiple times in the graph that large jumps in sentiment score are observed very shortly before large spikes in the price of Bitcoin.

## # A tibble: 538 × 3
##    date                sentiment_score  price
##    <dttm>                        <dbl>  <dbl>
##  1 2022-01-01 00:00:00           0.817 47687.
##  2 2022-01-02 00:00:00           0.725 47345.
##  3 2022-01-03 00:00:00           0.758 46458.
##  4 2022-01-04 00:00:00           0.738 45898.
##  5 2022-01-05 00:00:00           0.703 43569.
##  6 2022-01-06 00:00:00           0.702 43161.
##  7 2022-01-07 00:00:00           0.706 41558.
##  8 2022-01-08 00:00:00           0.709 41734.
##  9 2022-01-09 00:00:00           0.740 41912.
## 10 2022-01-10 00:00:00           0.738 41821.
## # ℹ 528 more rows

Another strong indicator of cryptocurrency is not the influence the masses have on the price, but how celebrities and other influential people can affect the price by simply tweeting. The most egregious case of this is between Elon Musk and the coin Doge. Dogecoin is what is known as a “meme coin” in the cryptocurrency space, meaning the only true value the coin has is based on users finding it amusing to give a fiscal value to a popular meme. While the purpose behind Doge may be a joke, it is a serious contender in the space with a current market cap of 23 billion U.S dollars (Coinbase.com). A large proponent of the rise in popularity of Doge was the CEO of SpaceX and Tesla, Elon Musk. Musk has an avid following on Twitter and has pushed Dogecoin relentlessly over the years. The following bar graph shows the relationship between the percent change of Dogecoin and whether Elon Musk tweeted about it that day or not. Using a large database of Musk’s tweets, I cross-referenced against a keyword database of various words that are commonly used when referencing Doge.

What is returned is a visualization that shows the strong influence Musk has on the meme coin. We see that on days Musk tweeted about the coin, there was, on average, a six percent increase in the price, and on days he did not tweet, there was a two percent decrease. This illustrates just how powerful a celebrity can be in terms of price change and how monitoring celebrities such as Musk could prove to be a profitable technique.

Reddit based Research

Another social media platform with great importance in relation to cryptocurrency is Reddit. Reddit is home to many communities, or “subreddits,” that are full of devout users who are constantly exchanging opinions and the latest information on cryptos. While Bitcoin is definitely the most talked about cryptocurrency, there are a multitude of others that also garner large digital audiences. Some of these include Ethereum (ETH), Litecoin (LTC), Ripple (XRP), and Polkadot (DOT). These coins all serve different purposes but are essential to the crypto economy. To give an insight into Reddit, the following shiny app uses data from over 20 different cryptocurrency-related subreddits. The app is a word cloud generator that allows the reader to see the most commonly used words when referring to the cryptocurrencies mentioned above. When viewing the app, it is easy to see the plethora of different names people refer to the cryptos as and how diverse the conversations around the tokens can be.

Link https://noahjosey.shinyapps.io/projectapp2/

Building off the keyword information, we take a look into how the discussions around these currencies can be used as a preemptive indicator of price. The Shiny app below shows the effect of social media on cryptocurrency. The end product is a strong showing of how when a cryptocurrency gains popularity on Reddit, the price of the asset is affected shortly after as more and more people are influenced by the communities they are involved in and enter the market.

Link https://noahjosey.shinyapps.io/Stat3280/

Social media as a whole

The last visualization we will be looking at is a comparison between a respected indicator, the fear and greed index, and the charted daily volume of Bitcoin. The Fear-Greed Index is a summarization of Bitcoin investor sentiment that varies from a level of extreme fear to that of extreme greed. The index is sensitive to the enormous influence of social media sites, scanning a multitude of different places to gather its data. When people are extremely positive about Bitcoin, the score is closer to 100, which signals greed. When the sentiment about Bitcoin is more negative, it signals fear towards Bitcoin, and in turn, the index score is closer to 0. The graph below runs a comparison for a two-year period, 2020-2022, for Bitcoin volume change and the Fear-Greed Index score. Bitcoin volume is a financial metric that shows how much Bitcoin (in dollar amounts) is being exchanged over a certain time period. In the case of our visualization, it is in terms of daily traded volume. A higher volume means there is a large amount of activity in the market and usually, large price swings are involved in this.

These emotional currents running through digital platforms are manifesting in the actual trading behavior of cryptocurrencies. Since the Fear-Greed Index can be seen as an indicator of the digital consensus built by social media, this chart clearly shows evidence of the growing influence of online communal sentiment on market dynamics and its progression to sentiment-driven financial decision-making in this digital age.

Conclusion

In conclusion, it is apparent that the impact of social media on the cryptocurrency markets is strong, and platforms such as Twitter and Reddit have a great impact in shaping these financial trends. The findings show the importance of digital sentiment, evidenced by the direct correlation between discourse and market movements. Additionally, the influence of public figures such as Elon Musk further emphasizes the power of online narratives in driving financial outcomes. The use of tools like sentiment analysis and the Fear-Greed Index gives great insight into how emotion and droves of retail investors can help drive market behavior. With their predictive capabilities, they are vital in an investment strategy. As the use of digital platforms increases, the correlation between the market and social media will only become more crucial to decision-making for retail and institutional investors.