Abstract
This study examines the influence of Reddit community sentiment on Bitcoin (BTC) market performance by introducing the Reddit Sentiment Index (RedditSI), a tool designed to measure daily sentiment among Bitcoin-focused subreddit users. Constructed using Natural Language Processing (NLP) techniques—specifically the Flair model—the index reveals significant correlations with BTC exchange characteristics (price, returns, volatility, and trading volume) through statistical analyses, including correlation, cointegration, and Granger causality tests. Findings underscore the importance of sentiment monitoring for investors, regulators, and researchers to navigate the psychological drivers of cryptocurrency markets.
Introduction
Reddit and Sentiment Analysis in the BTC Market
Cryptocurrency markets, particularly Bitcoin, are uniquely driven by investor sentiment due to their decentralized nature and lack of traditional valuation metrics. Reddit’s ecosystem, with communities like r/Bitcoin and r/BTC, serves as a real-time barometer of market mood, offering unfiltered discussions that reflect collective emotions influencing trading behavior.
Novelty of the Research
This study innovates by:
- Creating RedditSI, a quantitative sentiment index derived from Bitcoin-related subreddit comments.
- Applying advanced NLP (Flair model) for nuanced sentiment classification.
- Validating relationships with five BTC exchange metrics (price, returns, absolute returns, volatility, volume), unlike prior studies focusing on fewer variables.
Literature Review
Key insights from existing research:
- Social Media Impact: Platforms like Twitter and Reddit significantly influence cryptocurrency prices (Kraaijeveld & De Smedt, 2020; Georgoula et al., 2015).
- Sentiment Tools: NLP models (VADER, TextBlob) are common but limited by context-blindness; Flair offers superior contextual analysis (Loginova et al., 2024).
- Reddit’s Superiority: Deep discussions and upvote systems make Reddit ideal for gauging investor sentiment (McMillan et al., 2022).
This study bridges gaps by combining multi-method statistical analysis (correlation/cointegration/causality) with an expanded set of BTC metrics.
Methodology
1. Data Collection
- Source: Top posts/comments from r/Bitcoin, r/BTC, and r/BitcoinBeginners (January 2023–March 2024).
- Variables: Upvotes, comment sentiment (positive/negative), BTC price, returns, volatility, and volume.
2. RedditSI Construction
Formula:
[
\text{RedditSI}_T = \text{Upvotes}_T \times \frac{\text{Positive Comments}_T}{\text{Total Comments}_T}
]
- Process: Aggregated daily sentiment scores using Flair NLP.
3. Statistical Analysis
- Correlation: Pearson/Spearman/Kendall tests.
- Cointegration: Engle-Granger test for long-term relationships.
- Causality: Granger causality to determine predictive power.
Empirical Results
Key Findings:
Correlation:
- RedditSI showed strongest correlation with trading volume (Pearson: 0.64) and volatility (0.48).
- Non-linear relationships: Positive returns correlated at 0.4; negative returns at -0.31.
Cointegration:
- All BTC metrics cointegrated with RedditSI (p < 0.05), confirming long-term alignment.
Causality:
- Bidirectional Granger causality between RedditSI and BTC metrics (p < 0.10), indicating mutual influence.
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Discussion
Practical Implications:
- Investors: Use RedditSI to identify sentiment-driven entry/exit points.
- Regulators: Monitor sentiment to mitigate market risks.
- Researchers: Integrate sentiment indices into predictive models (e.g., machine learning).
Limitations:
- Focus on BTC-only subreddits; future work could include altcoins.
- Temporal scope (15 months) may not capture long-term trends.
FAQs
Q1: How does RedditSI differ from other sentiment indices?
A: RedditSI leverages Flair NLP for contextual analysis and Reddit’s deep-discussion format, offering more granular sentiment metrics than Twitter-based tools.
Q2: Can RedditSI predict BTC price crashes?
A: While not predictive, extreme negative sentiment correlates with heightened volatility (r = -0.31 with negative returns).
Q3: Why is trading volume most correlated with RedditSI?
A: High sentiment activity often coincides with increased trading, reflecting retail investor engagement.
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Conclusion
RedditSI demonstrates robust short- and long-term relationships with BTC market dynamics, validating Reddit’s role as a sentiment barometer. Future research should expand to altcoins and integrate RedditSI into algorithmic trading models.
Acknowledgments: This study was supported by HSE University’s Basic Research Program.