IDENTIFYING HERDING EFFECT AND OTHER BEHAVIOURAL BIASES IN CRYPTOCURRENCY MARKETS.

Abstract

Asset bubbles are often preceded by disproportionately large increases in the underlying asset’s price, fueled by speculation and the desire to make fast, easy profits. This allure drives investors to act without fully considering the information available to them, making them prone to behavioural biases such as herding behaviour. One such asset bubble occurred in 2017, with the cryptocurrency Bitcoin as the underlying asset. This paper explores the relationship between the returns of cryptocurrencies Bitcoin, Ethereum and Ripple, and identified “herd signals”, including investor sentiment, news announcements and extreme returns. Regression analysis finds evidence supporting the hypotheses of cryptocurrency investors herding towards investor sentiment and extreme returns in the cryptocurrency markets.