Understanding the dynamics of how Bitcoin’s value and social media interact and inform each other has been an intriguing field of research for many experts all over the world. Understanding their relationship can bring about a massive technological revolution in the field of business and policymaking. It is all going to be a bit technical to understand how the users’ participation in framing posts does not have the same effect on the bitcoin’s value.
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By now we all know how cryptocurrency, in general, or bitcoin, in particular, uses peer-to-peer transactions. P2P types are the kind of transactions in which no authorised bank acts as an intermediate for any transaction to happen. It is important to understand the characteristics that influence price movements in bitcoin since these act as a predictor or indication for the investors.
Understanding The Basic Distinctions Between Digital And Fiat Currencies
Before we delve into the technical aspect of the topic at hand, let us first understand how similar and different digital currencies are from the fiat ones. Cryptocurrencies enjoy the freedom from any sort of bank authorization which is so unlike traditional transactions.
Therefore, the logistics of how traditional exchanges work seems to be insufficient to build standard models to evaluate the value of bitcoin. In addition to these, theories suggest that bitcoins are similar to what we understand as stock rather than fitting into the definition of currency.
Furthermore, traditional exchanges uses traditional forms of media information whose rate of updating itself is much slower than the volatile nature of information on social media. Therefore, it is important to understand the complex dynamics of an association between social media and bitcoin value.
Vector AutoRegression (VAR)
Vector Autoregression is a statistical model. What it signifies is how the various variables, or in simple terms, multiple quantities interact with each other.
Vector Error Correction Model (VECR)
VECM is a more specific kind of VAR model which attends stochastic trends. Stochastic trends are trends in which there is a random element that alters the process in each run.
Therefore, what VECM does is that it integrates or restricts a pair of variables in the long-run process while accounting for autocorrelation in the short-run process. It is relative in nature since it accounts for reverse causality which means that a slight change in one of the variable pairs will account for the required adjustment in the other to ensure balance.
Vocal Minority is the cohort or assembly of those users who are most active and put up a majority of content on social media platforms.
Silent Majority is the cohort or assembly of those users who are moderately or less active and put the least amount of content on social media platforms.
Ways Social Media Is Affecting The Price Of Bitcoin
There are a few ways in which we can understand the market sentiment of the investors as well as the price movements in various cryptocurrencies with the help of social media.
1. Detecting User Sentiment By Using Natural-Language Processing Techniques
This research was carried out by Feng Mai who is a professor at Stevens School of Business and it was conducted with 2 years’ worth of data consisting of comments and posts by users from all over the world in a public forum called Bitcointalk.
VECM is a very effective tool to understand stochastic trends and also because interdependent variables need not be distinguished as endogenous or exogenous. It is also convenient since one does not need to be concerned with factors affecting a particular variable. Prior to this, the data was first subdivided into various categories of sentiments, such as positive, negative, and others. Factors such as volatility indices and price movements of gold which indicate the rise and fall of bitcoin prices were also used in their research.
As their results suggest, any kind of sentiment that rules social media commentary does, in fact, influence bitcoin prices. Positive reinforcement leads to a rise in bitcoin prices and vice versa.
2. The Potential Of The Silent Majority
What you need to realize is that the hypothesis that social media platforms that provide testimonials of public sentiments and users commenting on the said field do influence the price movements in Bitcoin.
However, it is important to understand that not all content has the same value. In other words, all user content shared in the form of posts and messages across various social media platforms do not have the same equity value when it comes to cryptocurrencies.
Vocal minorities play a huge role in swaying people to take interest in certain investments. This should not come as a surprise because they instigate herd behaviour. Since they have a higher frequency of social media appearances, they lead their herd of followers in the same direction as they cascade information from their level into their followers. This accounts for biases that highly favour certain investors.
However, such trends are not always true. Social media influencers and personalities are often susceptible to follow an agenda since they are usually endorsed financially to create hype. Either they are bought to do so or they might have invested in it. Furthermore, social media influencers also tend to reach out to each other’s audiences in order to raise their fan base, and hence, such activities tremendously boost certain investments much more than others.
The silent majority or the unbiased users of the platforms who have nothing to lose, spurt out occasional content which are genuine concerns regarding market sentiments and can posit as a more reliable source of information to understand a more generic view of market sentiment.
The question remains, what comments or posts greatly and more often impact bitcoin prices? Research tells us it is the latter section of users (silent majority) who rule in impacting bitcoin prices and thereby, causing more price movements.
All in all, social media is a powerful tool and acts as a great indicator in understanding price movements in bitcoin. It obviously does not exist without its hiccups. Risks are common but this guide will help you make a smarter choice since the information is statistically tested and authentic.