Mutual-Excitation of Cryptocurrency Market Returns and Social Media Topics

TL;DR

This paper investigates how social media discussion topics relate to cryptocurrency price movements using dynamic topic modeling and Hawkes processes, revealing specific topics that precede price changes and could inform trading strategies.

Contribution

It introduces a combined dynamic topic modeling and Hawkes process approach to identify social media topics that predict cryptocurrency price movements, offering new insights into market dynamics.

Findings

Topics like 'risk and investment' predict price drops

Discussion of 'substantial price movements' indicates volatility

'Fundamental value' topics predict price increases

Abstract

Cryptocurrencies have recently experienced a new wave of price volatility and interest; activity within social media communities relating to cryptocurrencies has increased significantly. There is currently limited documented knowledge of factors which could indicate future price movements. This paper aims to decipher relationships between cryptocurrency price changes and topic discussion on social media to provide, among other things, an understanding of which topics are indicative of future price movements. To achieve this a well-known dynamic topic modelling approach is applied to social media communication to retrieve information about the temporal occurrence of various topics. A Hawkes model is then applied to find interactions between topics and cryptocurrency prices. The results show particular topics tend to precede certain types of price movements, for example the discussion of 'risk and investment vs trading' being indicative of price falls, the discussion of 'substantial price movements' being indicative of volatility, and the discussion of 'fundamental cryptocurrency value' by technical communities being indicative of price rises. The knowledge of topic relationships gained here could be built into a real-time system, providing trading or alerting signals.