Cryptocurrency inspires passionate opinions, from those who believe it’s a transformative technology to those who fear it’s a fad. Whatever your view, it’s important to look before you leap into this volatile market. Learn how cryptocurrency works, where it can be used and who is investing in it before making any decisions.
A cryptocurrency is a digital asset that uses cryptographic systems to verify transactions. It’s an alternative to fiat currencies such as the US dollar, and it is designed to be decentralized with wealth distributed among many parties on a public ledger called a blockchain. But ownership of cryptocurrencies has become increasingly concentrated, with companies purchasing them for price appreciation and investment fund managers buying them to hold in their funds.
Bitcoin, which was created in 2009, is the best known example of a cryptocurrency. But there are thousands of others, and they all differ from one another in the way they work and what they can be used to buy. Some are used for illicit activities, like money laundering and drug deals, while others have found mainstream use in places such as online luxury retailers that sell Rolex and Patek Philippe watches in exchange for Bitcoin, and car dealers that accept it for premium payments.
News about cryptocurrencies has a big impact on prices, volatility and liquidity. We analyze the effect of news on these factors using data on the performance of individual cryptocurrencies from Refinitiv Eikon and a news sentiment index derived by using a lexicon-based Natural Language Processing technique (Loughran and Mcdonald, 2011). Our results show that positive (negative) news increases (decreases) the cryptocurrency index and individual cryptocurrencies’ returns. This is primarily because informed and uninformed traders trade more when they are confident in the future of the cryptocurrency, and less when they are skeptical.
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