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Extrapolative beliefs about Bitcoin returns

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  • Petkova, Ralitsa

Abstract

Using survey data from Sentix which records whether investors are bullish, bearish, or neutral about the future price of Bitcoin, we examine how investors form expectations about Bitcoin returns. We use a model for expectations with an exponential decay of weights on past returns and find that investors extrapolate from Bitcoin’s past returns in a way that puts more weight on more recent returns. Compared to institutional investors, individuals display a higher degree of extrapolation, consistent with the perception that nonprofessionals are more prone to behavioral biases. The extrapolative component of expectations is a significant predictor of Bitcoin returns in the short term, however, its explanatory power is small. Understanding how investors in the cryptocurrency market form their beliefs is important because variation in beliefs could affect Bitcoin price dynamics and potentially lead to excess volatility, momentum, and reversal.

Suggested Citation

  • Petkova, Ralitsa, 2023. "Extrapolative beliefs about Bitcoin returns," Finance Research Letters, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323004415
    DOI: 10.1016/j.frl.2023.104069
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    References listed on IDEAS

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    More about this item

    Keywords

    Bitcoin; Cryptocurrency; Extrapolation; Extrapolative beliefs;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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